The upcoming Federal Reserve meeting in September is raising concerns as two key data points might put the Fed in a dilemma regarding the extent of rate cuts. Particularly, there is keen attention on whether the US economy will experience a recession, given that past economic downturns in the US have often followed rate cuts.
Renowned investor Warren Buffett recently sold off US bank stocks once again, with the proportion of cash held by his companies in total assets now exceeding the levels seen before the subprime crisis. Speculation surrounds whether this move signals a potential “big retreat” akin to the pre-crisis period.
The Federal Reserve is set to convene for a rate policy meeting on September 18. Market consensus leans towards a rate cut being almost a certainty, with the focal point being the extent of the cut. Data from the Chicago Mercantile Exchange’s “FedWatch” indicates that around 55% of traders expect a 25-basis point cut in September, while approximately 45% anticipate a 50-basis point cut. The current federal funds rate stands at 5.25% to 5.50%.
Another focal point is the impact of rate cuts and their magnitude on the US economy. Experts hold varying opinions, with some expressing optimism. Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, stated optimistically in a report that with support from a robust private sector and central bank rate cuts, the risk of a bear market in US stocks remains low and the likelihood of an economic recession is also quite low.
Traditionally, a stock market decline of over 20% from its previous peak signals the onset of a bear market. Currently, the S&P 500 index has fallen by about 3.5% from its high in mid-July. In addition, Goldman Sachs economists lowered the probability of a US economic recession from 25% to 20% in August, citing better-than-expected retail sales.
However, well-known American economist Peter Schiff expressed on social media platform X on September 10 that “in fact, the US economy may have already entered into a recession for some time, although it has not been officially confirmed. Rate cuts by the Fed will not prevent an economic downturn.” He went on to bluntly state that “the game is over.”
Garry Evans, Chief Strategist of Global Asset Allocation at BCA Research, also foresees that contrary to market optimism, an economic recession is looming.
Key indicators for the Fed’s decision on rate cuts and their extent are the US core Consumer Price Index (CPI) and non-farm payroll data. However, the August data for these indicators may put the Federal Reserve in a bind.
Data released by the US Department of Labor on September 11 showed that in August, the core CPI increased by 0.3% month-on-month, surpassing expectations of 0.2%, with the previous figure at 0.2%. In comparison to the overall CPI, core CPI is considered a better reflection of underlying inflation. Additionally, the year-on-year core CPI rose by 3.2% in August, compared to the previous figure of 3.2%.
Neil Birrell, Chief Investment Officer at Premier Miton Investors, assessed the US CPI report, stating that the possibility of a 50-basis point rate cut by the Fed next week “was severely struck by this data, but it is also not enough to deter the Fed from cutting rates.”
On the other hand, data released by the US Bureau of Labor Statistics on September 6 indicated an increase of 142,000 non-farm jobs in August, falling below the expected 165,000, and bringing the three-month average to its lowest level since mid-2020. The unemployment rate also slightly decreased to 4.2%, marking the first decline in five months.
Sonu Varghesen, Global Macro Strategy Analyst at Carson Group, stated in a report following the data release that the labor market is clearly softening, necessitating Fed intervention to mitigate future risks.
Eric Wallerstein, Chief Market Strategist at Yardeni Research, suggested that in the absence of an economic recession or financial crisis, the Fed’s rate cut announcement this month will not exceed 50 basis points. A 50-basis point cut could evoke fears of an economic downturn, leading to market panic.
While rate cuts are generally seen as positive news for the economy and stock market, any loose monetary policy by central banks could also be a response to economic slowdown. Strategists at Deutsche Bank mentioned that in the past 10 economic recessions, the Federal Reserve had cut rates before half of them. The bank’s statement noted, “This indicates that rate cuts cannot promptly prevent economic downturns; instead, they often serve as a sign of impending troubles.”
Amid concerns over a potential recession in the US, Warren Buffett has recently shed a significant amount of stock and increased holdings in cash. The signals he has emitted through these actions are closely monitored.
Regulatory documents from the US Securities and Exchange Commission (SEC) revealed that Buffett’s Berkshire Hathaway began reducing its holdings of US bank stocks for three consecutive trading days starting on September 3, cashing out $760 million. Since mid-July, Berkshire Hathaway has been steadily decreasing its holdings of US bank stocks, amounting to nearly $7 billion in total.
US banks constitute one of the top five stocks in Buffett’s portfolio. Despite previously praising the management of US banks in public, stating he “doesn’t want to sell,” Buffett is now divesting from these stocks. In addition to shedding US bank stocks, Buffett has also sold off holdings in Apple, Chevron, financial holding company COF, and completely exited his position in US cloud computing company SNOW.
Berkshire Hathaway’s reports for the second quarter of 2024 showed that its holdings of Apple stock decreased by about half, with consecutive sell-offs over three quarters resulting in over $80 billion cashed out from Apple shares. Currently, Buffett’s cash holdings have surpassed $280 billion.
Buffett’s significant divestments seem to signal his cautious assessment of the current market situation, as well as readiness for a potential collapse of the AI bubble and economic recession that might unfold.