All About Rates

This week has been a relatively calm week, until we got to Friday morning. It should not be a surprise that it's all about interest rates at this point. Today's jobs numbers, at

least in the minds of investors, all but sealed a rate cut by the Fed later this month. This week's inspiration for the musings is the hit pop song, "Beat It" by Michael Jackson. It's rare that we would highlight a song by the same artist just a few weeks apart, but what can I say - it's a short week. Here’s some trivia about the song:

• The song was recorded by Michael Jackson in 1982 and released on the "Thriller" album in 1983. "Beat It" hit No. 1 on the Billboard charts in '83 and remained there for 3 weeks. It was certified 8x platinum in terms of record sales.

• Unusual to some of Jackson's other hits, this song was actually written and composed by Jackson. A previously little known fact is that Eddie Van Halen played the guitar solo on the song as a personal favor to Quincy Jones. Van Halen was not paid for the gig, other than the two six-packs of beer that were brought into the studio. When Van Halen's "1984" album reached No. 2 on the Billboard charts, it was held out of the #1 spot by "Thriller."

• What is even less widely known is that members of the band Toto played the instruments in the studio when recording this song. Steve Lukather played guitar, Steve Porcaro on synthesizer, and Jeff Porcaro on the drums.

• Jackson wrote the song about the streets and gang activity. Jackson was very detached from street life as he grew up in the entertainment industry. His interpretation is a bit more like "West Side Story" than actual gang life.

"Just beat it, beat it, beat it, beat it

No one wants to be defeated

Showin' how funky and strong is your fight

It doesn't matter who's wrong or right

Just beat it, beat it

Just beat it, beat it

Just beat it, beat it

Just beat it, beat it (ooh)

They're out to get you, better leave while you can

Don't want to be a boy, you want to be a man

You want to stay alive, better do what you can

So beat it, just beat it (ooh)

You have to show them that you're really not scared

You're playin' with your life, this ain't no truth or dare

They'll kick you, then they beat you

Then they'll tell you it's fair

So beat it, but you want to be bad"

Here's what we've seen so far this week..

This Ain't No Truth Or Dare. Everything has been leading up to today's Jobs Report as the last such report before the Fed meets later this month. The market has taken

today's report to solidify a rate cut at the next FOMC meeting. The market was expecting 75,000 jobs created in August, but only 22,000 were reported. The Unemployment Rate ticked up to +4.3%, which was largely expected. This indicates softness in the labor market, which was something that the Fed indicated would be a contributing factor to an interest rate cut. Today's labor report caused futures on Fed rates to rise to nearly a 12% probability of a 50 basis point rate cut later this month - something that has not really been in the cards until now.

The Fed is absolutely backed into a corner at this point. Among the items affecting the Fed's credibility is a stated inflation target of 2%, which the PCE Index has been trading above for 53 consecutive months now. With inflation fairly steady at 2.7%, well below the historical average of 3.5%, anything short of a 25 basis rate cut this month could send equities reeling.

It Doesn't Matter Who's Right Or Who's Wrong. We have warned investors for several weeks now that we're entering a period of the calendar year - September and

October - that tend to trade more volatile. A market correction should not surprise anyone, especially with a monetary policy mistake. However, corrections are not guaranteed. When markets are near all-time highs, a correction in equities (-10% or greater) has resulted only 9% of the time 1-year out from a market low since 1950. It becomes even less so 3yrs and 5yrs out. Playing the long-term when it comes to investing is typically the better solution.

A rate cut by the Fed could be even more bullish than some anticipate. The common phrase is buy the rumor, sell the news. However, when equities are growing and the Fed is accommodative, equities typically continue growing. In the 34 occurrences, when the Fed was cutting rates and forward EPS was growing above average, P/E ratios didn't contract, but rather, expanded further. Sticking to long-term investment and financial plans is the best play for investors right now in the face of uncertainty.

One of the songs that made him "The King of Pop"...

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