EB Daily Market Report - Market Outlook Update - Thursday, December 19, 2024
Market Outlook
The outlook for U.S. equities really became "muddied" after yet another "pivot" by the Fed. If this were the NBA, I'd have whistled the Fed for "traveling" a few months ago. I think they've been using both feet to pivot on several occasions. It's really too soon after the Fed announcement to determine what exactly is driving equity prices right now. Is it inflation? Is it our economy? Is it max pain?
Many stocks began weakening as November drew to a close, so I'd say there has been very real concern about the Fed changing its stance once again - long before the FOMC announcement yesterday. The fact that areas like transportation, real estate, small caps, etc. have been underperforming so badly suggests to me that reduction of the number of interest rate cuts in 2025 was on the minds of many traders. I don't believe this latest Fed action was warranted, and I believe the big Wall Street firms agree with me. I'm not sure that our problem is an inflation problem. I'm also not sure it's a potential economic problem.
I believe we have a Fed problem.
The second half of 2024 demonstrates, in my opinion, that this Fed, led by Chief Jay Powell, has no confidence in ANYTHING. Wall Street is sensing this indecision and waffling as a sign of Fed weakness and selling stocks as a result. I can't say that I blame them. Let's take a walk down recent memory lane:
- July 11, 2024 : June CPI released and comes in well below consensus estimates and we see MASSIVE rotation into areas that would benefit from a changing Fed policy from hawkish to dovish. Market participants begin expecting a rate cut at July 30-31 meeting.
- July 30-31, 2024 meeting: NO CHANGE in Fed policy, though Fed Chief Powell suggests that an interest rate cut could be "on the table" for September. Market sells off, including big selloffs in areas that were accumulated after the June CPI was released. Small cap IWM drops 15% in 3 days.
- July 30-31, 2024 MINUTES to the meeting. "The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting." (This is what happened at the meeting, but Fed Chief Powell never mentioned this, only that it was "on the table")
- August 23, 2024 Jackson Hole meeting (2 days after July 30-31 minutes were released). Fed Chief Powell declares that the Fed is ready to make a shift in policy and begin cutting the fed funds rate. Huge decline in early-August and subsequent recovery of entire loss was nothing more than manipulation.
That's how this insanity started. More recently, the Fed has cut the fed funds rate 3 times and had previously looked to cut the fed funds rate 4 more times in 2025. But now, the Fed has again pivoted, this time reducing the number of potential rate cuts in 2025 from 4 to 2. I have one simple question for the Fed. If inflation truly remains a concern, why did you just cut rates by 25 basis points and still promise to lower rates further in 2025. Basic Economics 101 says to RAISE rates if you believe inflation is too high.
What will the Fed do at the next meeting? Your guess is as good as mine.
Wall Street absolutely does not believe inflation remains a problem. How do we know this? First, growth stocks would have been CRUSHED yesterday after 2pm WAY more than value stocks. Yet, check out these growth vs. value ratios over the past week:
This past week hasn't been that bad for growth stocks vs. value.
Next, inflation would KILL the U.S. dollar, but look at what the dollar has done since the FOMC announcement yesterday:
The dollar SURGED! My initial reaction is that this could be more about max pain than anything and we discussed that on Tuesday evening - how the Fed could be the catalyst to trigger big selling in stocks with large net in-the-money call premium. Many of the stocks we discussed on Tuesday have been HAMMERED.
I'll be doing a lot of research over the next couple days and I'll keep you posted on what I'm seeing. It's difficult to make HUGE calls on one day of market action since the announcement.
Tom