Good morning! On Friday we covered whether the Fed made a mistake with its jumbo rate cut in September.

Today’s edition tackles another angle: If the Fed acknowledges a mistake, what happens to the soaring stock market?

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The Fed vs. everything rally

Assets of all stripes are in the midst of a record-smashing everything rally. 

However, some commentators have wondered aloud whether the US economy looks too strong for its own good. 

There’s a simple equation at play.

The Federal Reserve cut interest rates in September and markets see more of the same to come. At the same time, unemployment remains historically-low, corporate earnings are robust, and the long-awaited boogeyman that is a US recession still hasn’t arrived. 

It’s no wonder the latest Bank of America fund manager survey showed investors have shrunk their cash piles and ditched bonds in favor of stocks at record rates.

To that point, corporate bond spreads are hovering near historic lows, underscoring how upbeat investors feel about the economy. 

Meanwhile, bitcoin has rallied more than 10% over the last week and gold, a so-called safe-haven asset, surged above $2,700 on Friday for the first time ever.

The primary driver for all this optimism, according to Bank of America survey respondents, is indeed the expectation for cheaper borrowing costs.

Here are a handful of indicators investors are also cheering about, as Apollo chief economist Torsten Slok pointed out in a weekend note: 

• US consumers and retail sales look solid

• Continued jobs and wage growth

• Spending on data centers and AI remains strong

• Low debt-servicing costs for businesses and consumers that locked in lower interest rates

• US election uncertainty will soon be behind us

Together, these “tailwinds are increasing the likelihood that the Fed will have to reverse course at its November meeting,” Slok said.

To be clear, none of the conversations I’ve had with sources in recent weeks lead me to believe the Fed will derail the everything rally.

Traders, too, see roughly 90% odds for a rate cut in November, according to CME data.

That said, I do think Slok’s cautionary statement is worth keeping in mind. 

If the Fed does anything except cut rates, it would severely damage Jerome Powell & Co.’s reputation.

Nothing would scream “policy error” louder than a pause or hike after September’s jumbo rate cut. 

An unexpected surprise like that would rattle investors, who lately have only been emboldened to turn more bullish by the everything rally. 

For what it’s worth, overly-optimistic sentiment in itself is something to monitor.

Putting the Fed’s November meeting aside, investors look more bullish than ever.

CNN’s Fear & Greed Index — which tracks a combination of market indicators including moving averages, market breadth, and options trading — closed at “extreme greed” levels Friday. 

“The economy is in solid shape right now, but the market is trading like there’s zero percent chance of a slowdown,” said market strategist Tom Essaye, the author of the Sevens Report. 

“While it’s not right to say that investors are ignoring a slowing of growth, I think it is fair to say that investors are on the verge of ignoring the possibility of a slowing of growth.”

Comments or feedback? Reply directly to this email or let me know on X @philrosenn.

Elsewhere:

⏩️Tesla and UPS earnings come due this week. The stock market is coming off its sixth winning week in a row, and strong Netflix earnings helped the tech sector climb on Friday. So far, 79% of S&P 500 companies have seen a positive earnings surprise this quarter, above the five-year average of 77%, FactSet reports. (Yahoo Finance)

💰️Investors are positioning for the election. Everything from Kalshi’s prediction markets and Trump Media stock to utilities, gold, and currencies are in play. While financial advisors caution against making any major investments related to an election, that hasn’t stopped anyone from seeking an edge before November 5. (WSJ)

🌎️ The world is sitting on a $100 trillion time bomb. The IMF will gather ministers and central bankers this week for key meetings around fiscal policy and historic debt levels — which is primarily being fueled by the US and China. As one IMF official put it: “Our forecasts point to an unforgiving combination of low growth and high debt — a difficult future.” (Bloomberg)

Rapid-fire:

• The typical household income has increased by 29% since January 2020, but Americans needed to see a 86% increase to keep up with rising housing costs (ResiClub)

• Elon Musk is giving a $1 million prize every day until the election for voters to sign his petition (WSJ)

• Boeing and its labor union reached a tentative agreement that could end its monthlong strike (Barron’s)

• UBS bankers are under pressure from lawyers to reconsider the way they discuss ESG labels (Bloomberg)

• Data is piling up for a “no landing” scenario for the US, which could benefit high dividend-yielding sectors (Business Insider)

Election odds according to Kalshi, the biggest US prediction market:

Last thing:

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