Daily Rundown: September 22

J.D. DURKIN: Good morning, subscribers. It has been another week-- has it ever-- and another Central Bank decision as well. So no one better to break it all down than our resident Fed watcher, Mr. Bob Lang. Bob, good morning. Happy Fed week to you.

BOB LANG: Great to be with you, J.D. . How are you today?

J.D. DURKIN: Doing all right, my friend. So the Fed pretty much acted as expected. But talk to me about what stood out to you, especially when it comes to Mr. Powell's press conference. What did you hear in the Q&A?

BOB LANG: Well, I think the statement was pretty much-- and the action, which is no Fed rate hike or cut, was pretty much expected. But I would say the projections that were released and the comments from Chair Powell, J.D. , were pretty much what did in the markets this week. In fact, between Wednesday and Thursday, S&P 500 almost down 3% in just about a day and a half.

When there was hope that the committee would finally be done raising rates, and people were very hopeful of that happening at this meeting, the chairman pretty much poured cold water on that notion. And in fact, there could be several more rate hikes coming. And the markets are just about pricing in one more rate hike for sure by the end of the year, and even a very sliver of a second rate hike by the end of December.

So as inflation is not the only problem, it's the strong growth that could reignite inflation. And the committee came to a conclusion that GDP would be much higher in 2023. In fact, they upgraded their GDP estimates from 1% or 1.1% in June to 2.1%, or for this last projection. So almost 100% higher than previous estimates. That just may be too much to handle for them at this point in time of the cycle.

J.D. DURKIN: Does Bob Lang have a base case about rate hikes for November and December?

BOB LANG: Yeah, I think that the data remains hot, as it was last week. And of course, we saw headline inflation came in at an annualized rate of 7.2%, J.D. , 7.2%. People aren't recognizing that it was pretty much mostly driven by higher energy prices. So, yes, they will have a hike, maybe even two, by the end of the year. November is where I think it will happen fast, first and fast.

But rest assured, most of the hikes over the last 18 months will be with us for some time. I think that Chairman Powell is going to try and act like Santa Claus and say, look, you know what, we don't have to raise interest rates in December. It's right before the holidays. And we don't want to make everybody feel bad about higher interest rates.

J.D. DURKIN: I would not want to be on Jay Powell's naughty list, that much is sure, if he's Santa Claus. Bob, talk to me about the type of catalyst or the data points you think we should be mindful of between now and the November meeting. We don't have an FOMC meeting, let alone a dot plot projection, coming up in October. So we got to wait a little while. What will you be following in the weeks between now and then?

BOB LANG: It's all about wages for me, J.D. . And that's what I'm looking at, as these increase. And note, unions right now are getting a lot of headlines here as they're bargaining for higher wages. And this is going to be a huge theme going into 2024 and 2025. There's a lot of unions out there that would like to renegotiate their contracts. Or if their contracts are coming up, they seem to have some bargaining power at the negotiating table. And certainly a president in Joe Biden who is very supportive of their efforts.

So I think the Fed remains concerned over these higher wages becoming inflationary. And it's natural when employment tightens that we see inflation ignite. And that's what's called the "Phillips curve," which has been dead for years, but now is starting to see some interest. So as wages start to increase, we do see inflation starting to rise. That's just a natural progression.

J.D. DURKIN: Bob, ahead of the Fed decision, you warned members to check their calendars, as the last weeks of September historically tend to be a bit of a challenge for investors, to say the least. Are you still feeling a bit bearish as you look at the chart of the S&P after the heavy selling, like you said, about 3% or so, the last two days alone?

BOB LANG: Yeah, it's certainly true, and I think that the awful action after the September expiration, which was last Friday. And over the last 33 years, J.D. , we've seen markets fall 26 times during this week or the week following. Those are really good odds to play for a down market. So 26 down, 7 up, that's more than three to one chance that you're going to get a down week. So winning nearly four out of five times.

So the chart of the S&P 500-- I'm not going to pull any punches here-- it's awful right now. And the market is in a corrective phase as we speak. And it won't likely be over until the stock market is maximum oversold, which could be early next week.

J.D. DURKIN: So, I mean, Bob, listen, when you go back and you read what a lot of strategists thought would happen in 2023, a lot of the year-end forecasts had the S&P far worse than how it's performed so far. It was up 16% in the first half of the year. Right now, it's still up 13% and change. There are concerns for 2024, according to many strategists. They cite deteriorating business conditions, maybe a bit of a weaker consumer spend for next year.

But there are still a lot of optimism out there for strategists at places like Goldman or BofA to say, hey, maybe there's still room for the S&P to improve at some point between now and the end of the year. Where do you see the index going? Let's say, how is it poised to set up here for the fourth quarter? And do you also share those same concerns about what might lie for the index around the corner as we head into next year?

BOB LANG: So remember, the stock market is a discounting mechanism. And one of the things that I've picked out of the projections that were sent out from the Fed on Wednesday was the fact that they were looking for a 2.1% GDP for the remainder of the year. Now, if you balance that out with what we had in the first half, 1.9%, and we're possibly going to get 4%, maybe 5% GDP growth in Q3, they're anticipating a huge dropoff in Q4. And I don't think the stock market has already reflected that.

I think this correction that we have going on right now is anticipating that corrective move in GDP. Look, that's not a recession. But, J.D. , if you move from 4% to 5% growth down to 1%, that's certainly going to be feeling like a recession, isn't it? I mean, it's a huge drop. So I think from that standpoint, if the economists are right and the Fed is correct in their assessment there that fourth quarter growth is going to be slow, I think that that's going to put a lid and a limit on how much further, higher, the S&P 500 or the NASDAQ can go.

Look, the NASDAQ was up, as of the close yesterday, 34% for the year, mostly driven by a handful of names. And those handful of names, J.D. , they call it the Magnificent Seven-- Microsoft, Apple, NVIDIA, and Meta, and so forth, and Google. These stocks have been hammered. And they're down sharply from their recent highs, maybe 10%, 12%, 15%.

And if these are the stocks that were driving the momentum in the early part of 2023 to the upside, they can certainly lead the momentum to the downside if they correct even further. And people are going to say, look, you know what, we're already in October in a week and a half. I'm taking my profits, and I'm moving them off the table because there's a lot of uncertainty right now in the economy and in the markets.

J.D. DURKIN: So, Bob, speak to someone watching who may have a little bit of FOMO, who may say, oh, look at that NVIDIA rip your faceoff rally it's had year-to-date. I'm on the sidelines. I didn't get in on the fun on the Mag Seven. What do you tell those investors?

BOB LANG: Four letter word, J.D. -- wait, W-A-I-T. Got to wait. And we have to see how the smoke clears. Look, we saw a huge run in interest rates earlier this week, on Wednesday and then yesterday. We saw interest rates, J.D. , that we haven't seen in 17 years, 2006, 4.5% on the 30-year. We saw mortgage rates reach 7.75%, highest levels they've been since November of 2000.

So the market is telling you right now that the economy needs to slow down. And 4% to 5% growth in the third quarter, while applauded by Chair Powell on Wednesday, is far too hot for them to keep policy the way it is right now. So I would say if anybody is sitting on the sideline right now and they missed out on some of those gains early in the year, just sit back and wait. There's going to be some better prices coming in. But now is not the time to stick your hand in and start catching falling knives.

J.D. DURKIN: And we can't forget about how often Chairman Powell and his colleagues at the Fed have talked about the importance of aiming for below trend growth. Yet, here we are, the Atlanta Fed GDP now figure, 4.9%, at least for the current quarter. We've still got a few weeks to go. We'll see how it ends up settling down. But that's as of just a couple of days ago. But we've been following that number well north of 5% for several weeks there. Finally, here, Bob, while I have you looking ahead to the next week, what is the most important thing on your radar?

BOB LANG: Well, J.D. , I'm going to Italy tonight. So I'll be thinking about a bottle of wine and lots of good food to eat while I'm in Rome and Florence next week. But just a friendly warning that when I travel, all bets are off, right? And the market often pulls back sharply when I'm traveling. So just a little heads up for everybody. It never fails.

But as far as for the markets are concerned, this is the last trading week of September and the quarter. Many people will be talking about the JPMorgan Collar trade, which the third quarter trade is going to be ending on Friday. They will be looping into a new trade. It's talked about a lot. It's a big size trade. It's really just a defensive move. But people are going to be talking about it. Is it meaningful to us players as investors and traders? Not really. But it's just something that people are going to be talking about because people are attracted to those things like flies are to a flame.

But it's really nothing to worry about. But the market gets excited over it. And as far as that's concerned, we're going to have some heavy buying coming in and selling coming in, as we call it, "window dressing," as we approach the end of the month. And then it'll be, of course, the beginning of October. And we'll see where things are at. We'll have a jobs report the following week. But first things first, end of September is big.

J.D. DURKIN: Bob, I have often said we pay far too much attention to the September effect and what it does for markets, not nearly enough attention to the Bob Lang travel effect. When Bob travels, folks, you got to watch what happens to the indexes back at home. I hope you have an amazing trip, Bob, well-earned. I will definitely talk with you again as soon as you're back. Thanks for the insight, as always, Bob.

BOB LANG: Thanks, J.D. . Have a great weekend.

J.D. DURKIN: You as well. Enjoy your trip, my friend. Folks, that's going to do it for today. Have a wonderful weekend. We will see you again soon.