Fed Hike Shock, Weak Breadth, and a Volatile Week Ahead

Grant Calloway

Seven thousand six hundred thirty seven. That is, uh, that is where the S and P five hundred futures are floating right now, right in the wake of the Federal Reserve's first rate hike in, well, over three years. And on paper, if you just glance at the top line index on your screen, you might think, hey, this tape's tighter than a drum, everything is just fine. But I, I, I gotta tell you, if you look under the hood, the engine is making some very ugly noises.

Grant Calloway

According to analysis from Charles Schwab, only thirty one percent of S and P five hundred stocks trade above their fifty day moving average. Just thirty one percent. You know, back when I was standing on the floor of the New York Stock Exchange, when the floor still actually roared and we traded on paper and sweat, a tape like this was what we called a trap door. You get a handful of giant tech balance sheets holding up the heavy ceiling while the floor beneath the rest of the market is, uh, is completely rotting out.

Grant Calloway

And why is the floor rotting? Well, look at the rate market. Fixed income traders are getting slapped awake. Reuters reported that the CME FedWatch tool is now pricing in a fifty three point one percent likelihood of another twenty five basis point rate hike at the Fed's next meeting in October. A week ago that number was down around twenty seven percent. But Chair Warsh stood up there and made it crystal clear that the central bank is dead serious about getting inflation back down to two percent, no matter how much it hurts.

Grant Calloway

Combine that hawkish messaging with the ten year Treasury yield creeping right up near four point nine eight percent, and suddenly money is not cheap anymore. Then you throw in cross asset volatility. WTI crude oil is sitting up near one hundred two dollars and thirty cents a barrel because of ongoing escalation and supply fears around the Strait of Hormuz. And across the Pacific, the Bank of Japan just raised rates to a thirty one year high. That pulls global liquidity out of the system right when American consumers and transport companies are already getting squeezed by fuel prices.

Grant Calloway

So how do you trade this picture? Well, let's lay out both sides of the coin here, because the bulls and the bears are looking at the exact same tape and seeing two completely different movies.

Grant Calloway

The bull case rests almost entirely on central bank credibility and balance sheet quality. The argument goes that by stepping up with that twenty five basis point hike, the Fed successfully dropped anchor on long term inflation expectations before they could spiral out of control. Remember, that preliminary August University of Michigan survey had inflation expectations ticking up to three point four percent. So, in the bull view, taking action now keeps bond yields from completely running away and gives a durable floor to mega cap tech companies that generate endless oceans of cash flow.

Grant Calloway

But man, the bear case is gaining some real teeth. When you have crude oil over one hundred dollars and benchmark borrowing costs near five percent, profit margins get shredded. We are already seeing earnings guidance get cut across trucking and airline sectors because of fuel costs. And speaking of corporate transitions, Berkshire Hathaway dropped a bombshell with ninety six year old Warren Buffett stepping down as chairman to become chairman emeritus, turning the reins over to his son Howard while Greg Abel runs the operational side as CEO. Even the old steady hands are shifting their positions.

Grant Calloway

Looking ahead at the catalyst setup for this week, it is going to be a gauntlet. On Tuesday we get earnings from AutoZone and KB Home, which will give us a direct pulse on retail consumer health and the housing market under five percent yields. On Thursday, Costco reports, which is always a crucial gauge of consumer spending discipline. Then on Friday, we get the August durable goods orders and the final Michigan consumer sentiment numbers.

Grant Calloway

Plus, do not forget we are entering quarter end window dressing season, where institutional portfolio managers scramble to clean up their holdings before the books close. Expect volatility, keep your position sizes rational, and do not mistake a top heavy index rally for broad market strength. Alright, that is the tape for today. Talk to you next time.