 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Wednesday's Headlines 1. Federal Reserve Cuts Interest Rates by 0.25% 2. Markets Sell Off 3. Dollar Spikes 4. What to do When the Fed Cuts 5. The Dog Days of August Approach Markets Closed
 Markets Today
The Federal Reserve cut interest rates for the first time in almost 4,000 days by a quarter point, as expected. It was the first rate cut since the Financial Crisis of 2008-09, but markets didn't celebrate it that way. While this rate cut was widely anticipated and telegraphed by Fed Chair Jerome Powell for months, investors may have been looking for a sign that this was the beginning of a series of interest rate cuts that would take place over the coming months. That sign didn't come.
U.S. markets were moderately lower after the cut was announced until about 2:10 p.m. when Chairman Powell said these words:
"This cut is different from the start of a lengthy cutting cycle."
Let's just say that didn't go over very well. Markets dropped more than 1% on those comments and stayed down through the close. Here's a day chart of the S&P 500 courtesy of TradingView.  Powell has been consistent (for the past few months) about supporting the economy through monetary policy to sustain the economic expansion. In his press conference following the Fed announcement, Powell said that economic conditions have worsened since the start of the year—especially among businesses.
Manufacturing output and business spending has slowed, particularly outside of the U.S., which is partially attributable to the trade war. That has made more U.S. companies cautious about their own spending. While unemployment is near a half century low, inflation has been muted and lower than the Fed's 2% target rate.
The Federal Reserve's dual mandate is to keep the job market strong and maintain inflation at around 2%—it's target rate. Overinflation, or hyperinflation, is a problem. But 2% shows that businesses have what we call "pricing power." Since employment is strong and wages are rising as they have been, businesses should be able to raise their prices, at least a little bit. But that's not happening to the level that Fed expects it to given other economic conditions. Given that, lowering interest rates should increase spending among both businesses and consumers, which should allow companies to raise their prices. We'll see if that works, because as this chart of consumer prices shows, prices are stubbornly low.  Dollar Spikes on Rate Cut
An unintended consequence of today's rate cut was a strengthening of the U.S. dollar against other major currencies. Today it hit its highest level against other major currencies since May of 2017. While a strong dollar is great for U.S. tourists traveling abroad, it is rough for U.S. businesses who generate most of their sales abroad. That means farmers, steelmakers, heavy manufacturing companies, and just about three quarters of the S&P 500. Make no mistake, most large U.S. companies generate most of their sales outside the U.S. It's a globalized economy.
The Trump Administration has been admonishing the Fed for not lowering rates and promising to continue quantitative easing—the buying of U.S. Treasuries to increase money supply, which lowers the value of the dollar. Both would help bring down the value of the dollar to compete with other central banks like China, the ECB, and Japan. Well, it got the rate cut, but Powell said the Fed would finish reducing its balance sheet (aka quantitative easing) two months earlier than expected. That juiced the U.S. dollar, which has been strengthening since 2018 as the global economy has softened while the U.S. has remained relatively strong.  What to do When the Fed Cuts Rates? Monetary policy decisions like interest rate cuts are market moving events that impact investors. But they are also catalysts for consumers to take action if they are ready. Here's one way to think about it:
Consumers should look at all the loans they have with variable interest to see if those rates are falling commensurate with the expected cut in the Federal Funds rate. That's everything from variable rate mortgages, home equity loans, some credit cards, and auto loans. If those rates fall, they should take advantage of the lower borrowing costs and reduce their monthly payments.
If their lender does not lower rates, consumers should look to see if they can find a competitor offering a more favorable rate than the one they currently have and switch. A lower Federal Funds Rate can also lead to lower interest rates banks offer their customers on savings accounts. In that case, consumers should look for better places to put their savings that offer higher rates of return, like CDs and high-yield savings accounts.
As for credit cards, card issuers like Capital One and Citibank rarely adjust their rates lower, no matter what the Federal Reserve does. Those that issue cards with variable rates, which are based on the prime interest rate, can adjust their interest rates and are required to let you know when they do.
But a curious thing has been happening in the U.S. as interest rates have been falling for products like mortgages and savings accounts. Credit card interest payments keep rising.  Not surprisingly, credit card delinquencies are following suit. While the total number of bankruptcies is far lower than it was a decade ago, we are starting to see some concerning signs that consumers are falling behind. That's particularly alarming given that consumer spending makes up 70% of U.S. GDP and have basically kept the economic expansion alive and kicking over the past two years.  August Swoon Sorry to jump on the selloff wagon today, but you can't ignore history. With July coming into our rear view mirror (that went fast, right?), we are heading into one of the worst months for stocks of the year. That doesn't mean it will be this way in this year, but here's some context:
History doesn't always repeat itself, but it's good to have context as we head into the lion's month. 
chart courtesy www.koyfin.com  Nordstrom's stock increased by almost 8% upon reporting that it's preparing a proposal to increase stake in its retail locations. Shares of the auto parts company Aptiv also rose by nearly 8% today after topping its Q2 estimates and lifting its profit guidance.  Advanced Micro Devices lost its "buy" rate today, resulting in an over 10% price drop. Although Maxim Integrated's profits rose this quarter, its sales still decreased amid a general decline in the semiconductor market—leading to its shares falling by almost 8%.  Word of the Day You know why... Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation's currency.  photo courtesy nobelprize.org
Today in Financial History July 31, 1912: Milton Friedman is born in Brooklyn to Ethel Landau Friedman, a storekeeper, and Jeno Saul Friedman, who dealt in unsuccessful jobbing ventures. After decades as Americas leading conservative economist and one of the worlds greatest intellectual defenders of free markets, Friedman wins the Nobel Prize in economics in 1976.
https://www.nobelprize.org/prizes/economic-sciences/1976/friedman/facts/
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Wednesday, July 31, 2019
Unkindest Cut
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