🍔The Risk That Keeps Us Up At Night

3 major reasons we are worried about a possible selloff

Welcome back to MktContext! SPX ended the week virtually flat as markets were undecided about the near-term outcome. On one hand, tariff heat is down to a simmer but there still isn’t much in the way of resolutions. On the other hand, investors are starting to get impatient with Trump and we are on the cusp of deteriorating econ data. The major indices are right up at the 200-day moving averages, which they battled and rejected this week. We are starting to get a bit concerned that the market is too complacent. This post explains why.

Powell says nothing

The Fed held interest rates steady at the May FOMC. Powell said much of the same — economy resilient, labor market in balance, inflation still too high, lots of tariff uncertainty, will react to the data. Really, nothing we haven’t heard repeatedly before. And therein lies the problem.

The market is anxious for cuts soon, so no movement is quite hawkish. The implied odds for rate cuts are falling as economists push forecasts further out (some think the next cut won’t be until Dec or even the new year). Odds of a June cut dropped from 63% a month ago to now 17%. Traders now expect the Fed to be behind the curve — meaning they’ll keep rates restrictive on the economy until it’s too late and a recession hits. All because the Fed is hamstrung by the threat of tariff-driven inflation.

The below quote is Powell essentially shutting down the prospect of pre-emptive cuts:

You can look back at the 2019 cuts as pre-emptive. We did cut three times. The situation was, you had a weakening economy and inflation at 1.6%. That’s a situation you can move pre-emptively.

Now, you have inflation running above target for 4 years. And we have an expectation that we’ll see upward pressure on inflation. It’s not a situation we can be pre-emptive because we don’t know what the right response to the data will be.

-Powell, May 7 FOMC press conference

This is a big deal for stock markets because investors want falling interest rates as a tailwind to economic growth and stock valuations. The Fed is saying they will NOT pre-emptively cut because the conditions don’t warrant it, despite widespread uncertainty and cratering soft data.

Up until now there was hopeful optimism that the Fed could start cutting early, especially given the weakening econ data of late. That narrative is very quickly fading away and turning into a headwind for the S&P500.

The risk in the market (what keeps us up at night)

The rest of this article is paywalled. Inside, you can read about:

• Risk in the market

• Tariff news (UK and China)

• Mag 7 encroachment

• Technology still outperforming