By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Fed Helps Grease the Market

Money is the oil that keeps the market engines running smoothly, and the Federal Reserve just helped grease the gears by lowering its key interest rate target by a quarter-point this week.

Despite some recent signs of inflationary pressures, weakness in the labor market gave the Fed the license to ease monetary policy, and it looks like more easing is going to be on the way.

What got markets excited wasn’t the quarter-point cut. Everyone, and I mean literally everyone, expected that. What really got investors bulled up was the prospect of much bigger interest rate reductions going forward relative to what was expected heading into the Fed meeting.

Investors now expect – AT LEAST – two more quarter-point cuts between now and the end of the year, and one Fed governor was calling for a total of five cuts. An additional two cuts are expected in the first half of next year as well.

At least for the time being, it seems that investors will continue to party like it’s 1999.

It seems as if valuations no longer matter when making investment decisions.

By valuations, I mean the price of a company or stock relative to some fundamental metric like sales or earnings.

For some time now, it seems as if the most expensive stocks have been the best performers as the most sought-after companies keep getting more expensive with almost no regard to the prices that are being paid for their shares.

There’s a famous quote that markets can stay irrational longer than you can remain solvent – and that is indeed true.

I can’t say when some of these overvalued stocks will meet reality, but I would caution long-term investors to be careful not to acquire too many holdings in their portfolios at nosebleed valuation levels.

Looking Ahead: Watching the Data

We won’t be getting much in the way of corporate earnings reports for at least a few more weeks, so investors will be looking for clues in the economic data for signs as to where this market is heading.

With the exception of a couple of weak jobs reports, the data has been rather robust and shows little sign of a slowdown – if anything, it seems to be accelerating as we move into the final quarter of the year.

Next week, we’ll get a lot more data, including PMI numbers for both services and manufacturing, new home sales, durable goods orders and the Fed’s preferred inflation gauge – the PCE index.

Most of this stuff is fairly backward looking.  Forward looking earnings estimates continue to climb, which is primarily why the stock market continues to move higher as well.