Market/Fed Logic Take Quantum Leap

Shifts in the market this week have followed mixed messages from the Fed. The twists and turns have, at times, felt like quantum leaps from economic fundamentals and even

reality. This week's inspiration for the musings is the 1989 hit T.V. show, and one of my personal all-time favorites, "Quantum Leap." Here’s some trivia about the show:

• The show was moderately received in the ratings at first, as it's timeslot (something that matters little in the era of streaming) was often moved around. However, the show was consistently ranked in the top 20 in the weekly Nielsen ratings after it gained some traction among viewers. The finale, "Mirror Image," was released on May 5, 1993 and more than 13 million American households tuned in to watch the episode. The show was nominated for 32 Emmys, but only won 6. Though Scott Bakula & Dean Stockwell - the primary characters on the show - were nominated 8 times between them, neither won an Emmy for the show.

• Bakula was the first actor cast for the role of Sam Beckett. He felt an immediate connection with Dean Stockwell, who read for the role of Al and he lobbied the producers to cast Stockwell in the role.

• Deborah Pratt, who was the series narrator and the voice of Ziggy (the quantum computer responsible for Sam's predicament of continual leaps), was also an executive producer for the show. She was married to Donald Bellisario, the show's creator and producer.

• Bellisario was a legend in the television business. He produced many hit T.V. shows, including "Magnum P.I.", "JAG", and "NCIS." Of all of his shows, he said "Quantum Leap" was his favorite.

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

Quantum Leaps - Oh, Boy. In the pilot episode of "Quantum Leap," Scott Bakula ad-libbed the line "Oh, Boy" when his character realized he had leap into another being and had no idea where he was. Bellisario liked the line so much, it became the

signature line for each episode as Sam continued leaping into a new person each week. The markets and the Fed had their "oh, boy" moment this week as speculation swirled over next month's rate decision. Various comments by Fed speakers this week caused the market to re-evaluate the probabilities of a September rate cut. The odds dropped to 74% yesterday, after peaking at more than 98% just a week prior. After Powell's speech this morning, markets are higher, erasing all losses for the week, and the rate cut probability has increased back to 89%.

The whirlwind of comments from Fed speakers this week is borderline malpractice. Fed governors Schmid and Hammack made very hawkish comments during the week that caused markets to be skittish about a rate cut. On top of that, Fed governor Collins stated, "Rate cut may be suitable if jobs outlook worsens." Then, this morning, in marched Chairman Powell with his speech at the Jackson Hole Economic Symposium - subtly hinting at a change in "policy stance" that the market interpreted as a rate cut. It's odd, don't you think, that global economic leaders fly into a small regional airport like Jackson Hole to discuss global financial matters instead of the Fed hosting leaders in their newly-renovated buildings where they can fly into an international airport such as Dulles? But, I digress. The amount of monetary policy uncertainty indicates that the Fed is playing a very dangerous game at the moment. Similar points of monetary policy uncertainty have accompanied Long-term Capital Management, the 2008 Financial Crisis, and COVID.

Things Getting Right? The intro to each episode of "Quantum Leap" contained a brief narrating of Sam Beckett's predicament - he's trying to put right a wrong that occurred

in the past in the hope that doing so will return him to his own timeline. Perhaps that's what we're witnessing in the market this week. While some of the largest companies in the S&P 500 have taken a considerable step back this week - particularly the Mag 7 (down more than 3% before today's trading), the rest of the market has been more orderly. The market carpet shows some of those key names - Nvidia, Apple, Microsoft, etc - in red and down more than 1% for the week, while the rest of the carpet has a lot of green. This indicates there could be a slight rotation happening away from concentration to a more broad market participation among equities.

Despite all of the hand-wringing and fear-mongering over recession, the market data suggests something different. New lows on the New York Stock Exchange (that's more than 2,000 companies) never rose above 50 despite the pullback. This also suggests that market breadth is improving and what we just experienced is a short-term event, especially if the Fed comes to its senses and cuts rates next month.

Low Risk Just A Hologram?  Sam is aided in the show by his good friend Al. Al appears to Sam as a hologram that only Sam can see and hear. Risk is like that sometimes - just

when we think it's all clear, it comes back in rare form. In fact, we are entering a point in the calendar year when risk tends to rear its ugly head. September and October tend to be the more volatile months of the year. So, depending upon how the Fed shifts monetary policy (if, at all), we could see more volatile trading days ahead, but that doesn't mean the overall bullish trend is over. Patient investors who wade through stormy seas in the Fall are typically rewarded for staying invested through year-end, as December tends to be one of the better-performing months of the year.

It has been eight months since the Fed last cut interest rates. A rate cut in September would officially put the time between cuts at 9 months. While it's been a painful period

trying to determine monetary policy this year, long waits between rate cuts has tended to be bullish. When the Fed waits 5 months or more between cuts, 6 months and 12 months after the next cut tend to be positive 72% and 90% of the time, respectively. Instead of panicking over a rate cut tomorrow or the next day, the better strategy is to stay invested and adhere to whatever long-term investment philosophy guides your asset allocation.

Step into the quantum leap accelerator...

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