What Investors Need to See in Fed Minutes and From Powell at Jackson Hole

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With the Federal Reserve set to communicate to the public this week and U.S. stock and treasury prices rising, the market is making one thing clear. 

Investors want to see more interest rate cuts. 

The 10-year treasury yield is down to 1.6%, with the 3-month and 10-year remaining inverted (3-month at 1.88%). The Federal Reserve did cut interest rates July 31, much to the market's delight, but investors had already decided they want to see several rate cuts in 2019, as the inverted yield curve is perhaps the most convincing indication that many fear a recession is coming sooner rather than later.

When stock investors caught wind of the inversion, the Dow Jones Industrial Average sold off 800 points in one day on in early August. But the S&P 500 is up 3.3% from its own low on that day, with rates remaining depressed. This picture signifies investors are still looking for several rate cuts. The S&P 500 remains at a nearly 17% year-to-date gain. 

Although stocks have risen in the past week, bouncing off of the lower levels hit earlier in August, the forward one-year earnings multiple on the S&P 500 is still a touch below 17, below where it has reached this year when stocks rose on hopes of rate cuts. Lower interest rates often expand valuations, as corporate cash flows are discounted at lower rates. 

Federal Reserve chairman Jerome Powell will speak Friday in Jackson Hole, Wyoming and the central bank will release its July minutes Monday. 

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