I worked as a bartender to help pay my way through college…
So back in the day, I was behind the bar for plenty of happy hours.
And I don’t think I’m giving away a big industry secret when I tell you…
We poured the cheap stuff at happy hour. It was mostly house-brand liquors. We didn’t touch the bottles on the top shelf.
In the end, happy hours serve one big purpose…
They get people in the door.
They bring in money during what’s usually a slow time of day – after work but before dinner. They create a lively atmosphere that sets the tone for the rest of the night.
For patrons, happy hour is about something else. It boils down to what I said earlier…
You’re getting lower-quality liquor for a low price.
To that point, I’ll show you today why I believe we’re currently in a “happy hour” rally. And as you’ll see, it’s drawing more people into the market right now for the wrong reason…
Folks, the S&P 500 Index is up around 6% over the past eight trading days.
On the surface, a quick 6% gain for an entire index seems great. It’s a big reversal, too…
The S&P 500 had fallen about 6% over the previous nine trading days. And it was in an official “correction.” It was down more than 10% from its most recent peak in late July.
Now, I hate to be the bearer of bad news. But…
The current rally isn’t based on fundamentals.
In fact, it’s quite the opposite…
You see, stocks rallied recently after Federal Reserve Chairman Jerome Powell didn’t raise interest rates again. That’s important because the Fed now hasn’t hiked rates since July.
And there’s no way around it, folks…
Interest rates drive the stock market.
The Fed has now “paused” this rate-hiking cycle for two straight meetings. And the general idea that rates might not go higher caused a knee-jerk rally in the stock market.
However, other factors are at work as well. The stock market became “oversold” after falling into a correction. And everything happened at a seasonally weak time of the year for stocks.
When you put it all together, a lot of investors started rushing in the door because they feared that they would miss the lower prices. They didn’t want to miss the happy hour.
That makes it a technical rally – not a fundamental rally.
Ultimately, the Fed doesn’t really need to do much. Sometimes, it just needs to talk a big game. And in response, people show up for happy hour in search of the best deals.
But we still need to be careful…
We can’t fall into the trap of thinking the happy-hour prices will go all night.
The Fed hasn’t fully abandoned its plan for higher rates. And if rates stay higher for longer, it could hurt the stock market once again…
Specifically, higher rates hurt companies’ future earnings. That trickles down through the economy.
We’re already seeing lower demand for cars, homes, and even dining out. Plus, banks aren’t making as many loans because of the lack of demand at higher rates.
As rates increase, borrowing expenses and the prices of goods both increase as well. But companies can only do so much to pass on the costs…
If they raise prices too much, they risk losing customers who don’t want to pay the higher prices. Then, they’ll make less revenue. And in turn, their earnings will start to slow.
When that happens, the broader economy slows down.
So in recent weeks, the Fed’s rate-hike pause has created a happy-hour rally. But it’s not built on strong earnings or other fundamental factors.
That makes the recent rally complicated. Investors see lower rates on the horizon. And it’s serving as a boost for the markets.
But the rally might be temporary…
Remember, falling rates are a sign of a slowing economy.
Eventually, lower rates will spur economic activity. But importantly, a lag will occur – just like what happened with higher rates and slowing things down.
We can still enjoy the happy-hour rally while it lasts. But we need to be careful.
We’re not in the clear yet. The economy might keep slowing down in the months ahead.
Good investing,
Pete Carmasino
