The chart below shows the continued rise in weekly jobless claims will eventually meet with downside surprises in nonfarm payrolls. These are the unknowns we are pondering these days. We believe it will. The Federal Reserve cut interest rates by 50 bps this week, in line with our expectations. The stock market was disappointed, as expected.
Monetary policy affects the economy with a lag.
With that in mind, it seemed quite unjustified and unrealistic for the market to expect the Fed to do more. The Fed did not do more, and the equity market was disappointed. It has become clear that there is a lot more going on in the equity market than can be solved with lower interest rates. Market participants looking back on the fall of 1998 seem to forget that the Fed s aggressive reliquification of the financial system came in the midst of strong profit growth. That is not the case now.