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Federal Reserve Shocks Market by Doing Exactly What They Said They’d Do

The Federal Reserve concluded its January meeting by deciding to keep the fed funds rate unchanged. There have been times in the last couple of months where the market put a 60% – 70% probability of a January rate cut. DKI has insisted all along that while we’ve hit the terminal rate (the highest fed funds rate for this cycle), there would be no rate cut in January. By the start of trading today, the market had priced in a very small probability of a January rate cut with a high probability of a rate cut at the upcoming March meeting. DKI has been in the “higher for longer” camp for over two years.

The big S&P 500 and NASDAQ indexes started the day down due to last night’s tech earnings. Google had a fantastic quarter, but missed high expectations. Microsoft also had great results on an absolute basis; however, expectations and valuations are very high for the Magnificent 7 stocks that carried the indexes through all of 2023.

When investors saw the Fed had removed language about potential future rate hikes from the press release, the market started to recover. Then Powell made it clear that a rate cut at the March meeting was unlikely. That sent the market down further with the S&P 500 closing down about 1.6% and the NASDAQ down 2.2%.

All of this is consistent with DKI thinking and writing and is why we’re so heavily hedged right now. No change in portfolio outlook or composition.

Coming into today, the market expects a total of 6 rate cuts in 2024 (1.5% reduction in the fed funds rate). I think that’s unlikely. There’s a huge quiet battle going on right now between the Federal Reserve which wants to get inflation under control and the combination of Congress and the Treasury which is engaging in massive spending and monetization which is inflationary. Given that this is an election year, and that no one in Congress has any intention of cutting spending, this massive stimulus is going to continue meaning the Fed is likely to cut less than the 1.5% currently expected. Again, if I’m wrong about this, it’s almost certainly going to be because the economy enters a bad recession. That outcome won’t be great for stock prices.

As always, IR@DeepKnowledgeInvesting.com if you have questions.

 

Information contained in this report, and in each of its reports, is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied.  DKI makes no representation as to the completeness, timeliness, accuracy or soundness of the information and opinions contained therein or regarding any results that may be obtained from their use. The information and opinions contained in this report and in each of our reports and all other DKI Services shall not obligate DKI to provide updated or similar information in the future, except to the extent it is required by law to do so. 

 

The information we provide in this and in each of our reports, is publicly available. This report and each of our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion in this and in each of our reports are precisely that. Our opinions are subject to change, which DKI may not convey. DKI, affiliates of DKI or its principal or others associated with DKI may have, taken or sold, or may in the future take or sell positions in securities of companies about which we write, without disclosing any such transactions.

 

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