There's the real financial world and then there's the stock world, and they are two very different animals.
That's how you have to think about the upcoming quarter-point rate cut by the Fed -- the first in 10 years -- and the action in today's trading, where the Nasdaq got spanked, but the industrial laden Dow Jones industrial average went higher.
Let's set the stage, and then deal with the implications. On Wednesday, Fed Chief Jay Powell will give us his read on the economy, and, we hope, at least the bulls do, give us a quarter-point's worth of rate relief to try to keep the flagging economic expansion going.
Now, I know there will be some sticklers, who will say with unemployment at lows not seen in 50 years that it's ridiculous to ponder a cut. There are others, like the president of the United States, who think that we need more than 25-basis points, if our country can stay competitive vs. our foreign opponents, countries that used to be regarded as trading partners.
President Donald Trump has endlessly tweeted, including on Monday, that the Fed has kept us from growing the economy fast enough and putting even more people to work. The President believes that the high rates make the dollar too expensive and keep the expansion from reaching all Americans, including those who have been disenfranchised for whatever reason.
Powell, to his credit, realizes that the last rate hike was a rate hike too far, one that shocked the confidence out of business people and caused the December mini-bear market that we are finally recovering from.
He wants to cut rates for certain, and he has the cover that the reason for the economy's relative weakness is uncertainty caused by the president's tariffs.
We know that the tariffs have slowed the economy, we know it from endless conference calls that we have listened to, as execs complain -- some would say bellyache -- about the tariffs and how they have frozen expansion. We know from Nick Akins, the CEO of American Electric Power (AEP) , who cited talked on "Mad Money" about the slowing of electricity use, a number that can't be jiggered.
Powell can talk about how the cut is needed, because the president could slow the economy even more than he has if he puts tariffs on an additional $320 billion in in goods. What a great way to offload the blame!
It's not just the tariffs: If Boeing has to halt production of the 737 MAX, you are going to see an actual dent in our country's growth. And if you look on the critical list of retailers, you know there are going to be a huge amount of layoffs ahead.
So if you look at the landscape, if the Fed doesn't give us relief, it's pretty certain that we have seen the peak in employment for this cycle.
But how about the stock market? What's the impact on the stock market from a quarter-point cut in the real financial world? Isn't it minuscule? Isn't that what any economist might argue?
I think that's wrong in two ways. One, you know business people are going to be a little more gutsy about what they want to do, knowing the Fed is on their side. They will also be emboldened by the possibility that the strong dollar, which has hurt them so much, could, at last, stop climbing. That would be gigantic, and a real boost to earnings.
But it's the second way it helps the stock market that matters to you that evades the ken of most economists. Big-time portfolio managers know there's a playbook on a rate cut. You sell high growth that doesn't need a rate cut to make its numbers and you buy cyclicals -- you buy the industrials that actually might benefit from the cut.
Now, here's what you need to know about the playbook: It may not be right. Maybe there won't be more cars bought, so you shouldn't be buying the stocks of 3M (MMM) or Illinois Tool Works (ITW) or Lear Corp. (LEA) . Maybe there won't be more construction, so you shouldn't be stocking up on Caterpillar (CAT) or United Rentals (URI) or Union Pacific (UNP) .
But it doesn't matter. You don't fight the Fed when it eases, and you don't fight the tape, which means you don't go against the playbook. Don't fight the Fed and don't fight the tape were two precepts articulated by the late great Marty Zweig, a frequent guest on "Wall Street Week" more than 30 years ago, and most fund managers are loath to go against them.
How does this play out in the market's field of battle? Let's use some stocks as metaphors. Last week Caterpillar delivered a subpar quarter when many, including myself, thought that CAT would be better than feared, or BTF.
It didn't work out that way and the stock got rocked, falling from $138 to $131. Now, it's making a comeback, up nicely Monday.
But how about the super-growth stocks? They are being pummeled again, something that's become a real theme ever since ServiceNow (NOW) and Paypal (PYPL) reported numbers that many on the Street didn't like. We spoke to ServiceNow's John Donahoe, and I think that the quarter was actually quite good. But the market has spoken, and it's now down about 20 points since it gave you quarterly numbers. Paypal's stock deserves to go down, as the company did guide down, but the pin action of this and ServiceNow is outrageous, and it's being fueled by the rotation.
What should you do about this whole sea change out of supercharged growth and into the stocks of companies that aren't doing all that well yet?
Frankly, while I wanted to explain why things are happening, I don't want you to take action on them because a lot of what I described is the bailiwick of the fund managers themselves and not you at home.
Let me go one step further. The stocks that are going down are those growth stocks that almost never come in. Cloud kings like Salesforce.com (CRM) or Workday (WDAY) or VMware (WMW) or Splunk (SPLK) or Twilio (TWLO) or Adobe (ADBE) are excellent companies with stocks that I always hate for you to chase. When you see these rotations you can finally get into one of these stocks at a discount. There is no hurry. We have to let the whole Fed drama play out. There are always late-to-the-party fund managers who are going to figure out what I just told you and take action after the Fed cuts. That's when I would make my move.
And the cyclicals? They are cheap. They might see better business. There's a cyclical scarcity out there. But you have to deal with the endless trade talks that I do not necessarily think will be fruitful. If they aren't, this rally is stopped in its tracks regardless of the Fed.
But the super growth companies? They will do fine no matter what because they are about the greatest secular trend out there, the digitization of all businesses. It's a necessity, as you will hear when I discuss the results of Starbucks (SBUX) later.
So accept that the fund managers are taking these actions because of the Fed. But understand that your job is to buy stocks and hold them for as long as your homework shows that their businesses remain strong. And if you can't do the work? I would be ready to commit new money to this market, via an index fund, if we get a sell-off from a disappointing statement or actions by the Fed come Wednesday.
CAT, CRM and TWLO are holdings in Jim Cramer's Action Alerts PLUS member club.