What Happens If the Fed Starts Cutting Rates?

It was a week when cosmetics and other related stocks surged sharply on news that China is finally abandoning its zero-COVID policy and moving toward reopening.

John Waldron, president of Goldman Sachs Group, warned that China’s reopening could be “bumpy,” and that, combined with mild recessions in Europe and the United States, it could create a broadly challenging economic environment.

He delivered these remarks in a video message released at the Shanghai Bund Summit.

His candid comments on China’s policy shift from zero-COVID to reopening, together with ongoing geopolitical tensions, offer a clear view of how overseas creditors currently see China.

Global investment banks have been quietly cutting back on China-focused bankers, reflecting growing doubts over whether China can really become the deal-and-fee machine they once hoped for.

After last week’s rebound, the four major U.S. indices fell sharply, with the Russell 2000, which has a heavy weighting in energy companies, standing out with a 5.03% decline.

Next came the Nasdaq (-3.59%), the S&P 500 (-3.35%), and the Dow Jones Industrial Average (-2.72%).

In our AWARE subscriber seminar, I picked the Dow Jones Industrial Average as my preferred index, saying I “like stability,” and the Dow’s relative strength has indeed been consistently holding up.

The warning we shared in the seminar about the energy sector (-8.45%) also proved valid, as the so‑called “value-stock crowding” is now clearly unwinding.

The next biggest weekly losers were communication services (-4.81%), consumer discretionary (-4.47%), and financials (-3.90%).

You can’t draw firm conclusions from just one week, but the sharp drop in energy in particular suggests that this week’s market message was: “A recession is approaching.”

Meanwhile, although all sectors fell, utilities (-0.28%), healthcare (-1.29%), and consumer staples (-1.68%) managed to decline the least,

underscoring that polarization in the market is still very much in place.

At one point, the energy sector’s year-to-date return had surged to around +67%, but it has now dropped back to 49%, showing how sharp the recent correction has been. Despite the broader market weakness, the relative strength of utilities, consumer staples, and healthcare continues to hold up.

Consumer discretionary, which had looked like it might be staging a rebound, ranked as the third-worst performer this week and has started to plunge again. A key driver was Lululemon (LULU), the yoga-wear and athleisure company, which on Thursday evening U.S. time (Friday morning Korea time) issued disappointing sales guidance and signaled weaker profitability.

LULU shares fell about 13% during Friday’s session and closed at that lower level.

As discussed in the seminar, analyst earnings forecasts for S&P 500 companies in 2023 still look overly optimistic and are likely not fully reflected in current share prices.

From Morgan Stanley to JPMorgan, investment-bank strategists have repeatedly warned that the bear market is not over yet.

Their main arguments are that the “earnings recession” cycle has barely begun, and that the Federal Reserve’s room for policy easing is even more constrained than before.

Jason Trennert, chairman and chief investment strategist at Strategas Securities, advises investors betting on a Fed pivot to take a hard look at their positions.

Since the 1970s, even when the Fed has shifted from a tightening cycle to its first easing move, the S&P 500 has continued to fall in all but one case, with an additional average decline of about 23.5%.

Three-line summary: