Is the Summer Rally Built to Last?

Markets bounced back strongly after Powell’s Jackson Hole speech, but questions remain about whether momentum can carry into the fall. Scott Bauer of Prosper Trading Academy joins Jeff Praissman to unpack Fed policy, inflation data, and what’s next for tech, retail, and investors as summer winds down.

Summary – IBKR Podcasts Ep. 291

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi everyone, this is Jeff Praissman with Interactive Brokers Podcast. It’s my pleasure to welcome back to the podcast studio Scott Bauer, the CEO of Prosper Trading Academy. Hey Scott, how are you? 

Scott Bauer

Jeff, we’re winding summer down, but all is good. How are you? 

Jeff Praissman

I’m good, I’m good. Yeah, it’s crazy to think that Labor Day is this weekend coming up. And it’s always great to have you on our podcast as we talk about the markets — the past five days, the upcoming five days, and what’s going on in the markets. And for our listeners, you can find more from Scott at prospertrading.com and on our website as well under Education and Podcasts. 

Scott, it’s been, as usual, another crazy week in the markets. Last week the S&P 500 rebounded strongly from the recent correction. It gained over 2%. Was this primarily driven by the positive reaction to Powell’s Jackson Hole speech on Friday? And what does this more dovish tone signal about the Fed’s approach to rate cuts the remainder of the year? 

Scott Bauer

So it definitely was — there’s no question about it. Now, we can see some shifts coming forward the rest of this week with Nvidia and then PCE, big inflation data. But for sure that rally was all on that shift, and the market sentiment really thinking, Okay, rates are gonna come down. I don’t think anybody should get ahead of themselves and say, Okay, there’s gonna be one in September, maybe another in October, another in December, because we have so much data — especially between PCE, and then next week we’ll get another jobs report. 

So I think we have to remain a bit cautious about that. But the market definitely liked that shift out of Powell. 

Jeff Praissman

Yeah, and you mentioned Nvidia, and that kind of leads me right into my next question. Once again, they showed a remarkable revenue increase — I think it was over 120%. Yet it still initially sold off before recovering. 

Is this signaling a shift in how the market values even the strongest performers in that AI space? And what do you think this suggests about the sustainability of the AI trade that we’ve been seeing for so long? 

Scott Bauer

This is really gonna set the landscape for AI, and I was just looking at a stat — I think over 35% of all the S&P companies are tied into AI. Nvidia is certainly huge, but they do have a pattern of having really good earnings, beating revenue, beating everything — and then trading off of that. I think that’s one of those buy the rumor, sell the news type of events. I wouldn’t be surprised if we see that out of Nvidia. But for right now, unless they say something really awful about their guidance, I think you still have to believe in the AI trade. 

Jeff Praissman

Yeah. And in our last podcast a few weeks ago we talked about retail stock earnings coming up. I think we talked about Walmart and a few others. Macy’s and Gap surged last week despite mixed earnings reports across the sector. 

Are investors becoming more optimistic about consumer spending heading into the holiday season? Or was this merely a relief rally after the significant underperformance? 

Scott Bauer

I think investors are a little bit more positive. Consumers are a bit more positive. We’ve seen a lot of pessimism, a lot of hesitation, but between the last CPI — which did not show runaway inflation — and then, of course, last week with what Powell talked about in that shift, I think the mood and the sentiment is better. 

You’re seeing stocks that have been beaten down, that are so tied to the retail landscape, picking up a little bit. And we may see that continuing after these next reports that we get. 

Jeff Praissman

Yeah, and this week brings that crucial Personal Consumption Expenditures inflation report — the PCE report. It’s coming this Friday, which really is the Fed’s preferred inflation gauge. If we see a moderation in core PCE — and I know you touched on this earlier — how likely is it that they’ll offer a 50 basis point cut? Or would they maybe just go back to 25? And how would markets react? 

Scott Bauer

To me, I don’t think 50 is in the cards at all. Even if there is a really positive PCE report, and even if the jobs report next week is a number the market likes, I don’t think 50 is in the cards. But what we could see is a big shift as to further rate cuts, whether it be the last quarter of the year or even going into the first quarter of next year. So I think 25 is pretty much locked in. And for me, if they made a 50 basis point cut, that would show a little bit of concern out there. 

Jeff Praissman

And sadly, summer’s coming to an end with Labor Day approaching. I know technically it’s September 22nd, but as everyone thinks of summer and going back to school, Labor Day is the cutoff point. Should we expect lower trading volumes — which usually come up during this period — to exaggerate market moves? Because with lower volume, everything’s more affected. Which sector might see the most outsized moves? 

Scott Bauer

We typically do see lower volumes going into a long holiday weekend. But again, with the Nvidia report and then this critical inflation report Friday, I think we’re gonna be active until that report comes out. Now, come Friday afternoon, after the move has potentially been made, if there’s a big move off of PCE, I think volumes drop off the table as the day progresses. This whole summer, Jeff, where people expected — myself included, because history says we would see lighter volumes — has actually been pretty active. 

Jeff Praissman

Yeah, and I agree. I know we’ve discussed it in past podcasts. My final question is gonna be counterintuitive to what I just asked, because the end of August also marks some portfolio rebalancing for a lot of institutional investors. 

Given the significant outperformance of technology versus other sectors this year, do you think we’ll see any notable rotation as managers adjust their allocations? Or will it be the same game plan as it has been? 

Scott Bauer

I think portfolio managers may have two scenarios — and that’s based off of what Nvidia says. If Nvidia comes in as expected with no surprises, or even gives really good guidance, I don’t think we would see much of a shift out of technology, even though there’s just a short window there. However, if the opposite happens and Nvidia is a poor reporter, gives really poor guidance, you may start to see a shift out of there. 

Jeff Praissman

Scott, this has been great as always. And again, for our listeners, you can find more from Scott at prospertrading.com or on our website with all our podcasts — click on Education, click on Podcasts. Also our usual sources: Amazon, Spotify, Apple Music, etc. Scott, until next time, thanks for stopping by and enjoy your Labor Day. 

Scott Bauer

You as well. Thanks, Jeff.