That settles it.
The Federal Reserve is sure to “pivot” in 2024.
That explains why the S&P 500 gained 60 points from the Fed’s announcement to the close of trade.
What does this all mean?
Surely it just means it’s time to buy… the positives of owning stocks now outweigh the negatives.
We wish it were that simple.
But our skeptical inner self always falls back on the old saying…
“If something seems too good to be true, it probably is.”
We’ll share more of our thoughts below. But first…
Market Data
The S&P 500 closed up 0.3% to end the day at 4,719.55… the Nasdaq added 0.2% to close at 14,761.56.
In commodities, West Texas Intermediate crude oil trades at $71.70, up $1.91…
Gold is $2,050.50 per troy ounce, up $8.70…
And bitcoin is $43,018, up $266 from yesterday.
Now, back to the story of the day…
Don’t Be So Sure About the Fed’s Predictive Powers
As we look at the Fed’s statement and Chairman Jerome Powell’s Q&A after the announcement… we can’t help but think the market is at risk of getting ahead of itself.
After all, the idea of a “pivot” was that the Fed would signal it’s ready to cut rates.
We won’t claim to be a “Fed watcher”… or even claim to have any inside knowledge of how the Fed acts and reacts to specific data.
But what we can do is look at history and the Fed’s accuracy (or lack thereof) from previous meetings.
From what we can tell, the reason the market got excited about potential rate cuts wasn’t due to anything Powell said… Or even anything written in the statement (effectively, the press release that lets the market know the Fed’s decision).
It was all due to what the Fed calls its “dot plot” chart.
Here’s the latest version and a basic explanation… The red dots pinpoint where individual Federal Reserve members expect the Fed Funds Rate to be at the end of each year if all their expectations play out.
So right now, they all obviously expect it to be 5.25-5.5% by the end of this year… because that’s what it is now and the next Fed meeting isn’t until January 30.
Unless for some reason the Fed needed to call an emergency meeting – as it did in March 2020 – there won’t be any changes.
Looking ahead to the end of 2025… If you follow the green line, the median expectation is for the rate to be around 4.5-4.75%. By the end of 2025, Fed members expect it to be 3.5-3.75%. And so on.
That’s all fine. But as we noted, it depends on the assumptions they make today about the future being correct. And we know from history that hasn’t always been so.
The Fed’s total failure to foresee the build-up of inflation in 2021 and 2022 is perhaps the most recent example. And for that reason, it shows just how unwise it can be to rely on the “dot plots.”
To show you why, let’s move back in time to December 2021. At the time, the Fed Funds Rate was 0.25%. And in its statement, the Fed noted that it expected a “reduction in inflation.”
Bear in mind that inflation at that time was already at 6%… up from 1.7% in February that year.
Anyway, the Fed’s prediction for future rate levels from its viewpoint in December 2021? Here’s what the “dot plots” showed at that time:
For the end of 2023 (that’s now, folks) it forecast rates would be around 1.5-2%. At the time the Fed released the statement, the interest rate was 0.25%.
The actual rate today, is, of course, 5.5%.
We’re not saying we’re perfect. We understand people… even a collective group of really smart people… can make mistakes or can get predictions wrong.
That’s just human nature.
All we’re saying is that we would be careful about getting too carried away based purely on Fed predictions. Now, if there are other reasons to get excited, fine.
Maybe it’s just our naturally conservative attitude to the markets. Time will tell.
Good News or Bad News
Is this “good” news or “bad” news? We note with interest, this story from Yahoo! Finance:
U.S. bankruptcy filings are picking up steam after a two-year decline.
According to a report released by S&P Global Market Intelligence, there were 591 bankruptcy filingsas ofNov. 30 this year, just behind 2020’s tally of 603 in the same period. By comparison, there were 367 filings at this point in 2021 and 325 in 2022.
You could argue there’s an element of good news. Companies that were only viable due to ultra-low interest rates can’t survive in a higher-rate environment.
It likely helps with the Fed’s prediction about interest rates. If bankruptcies continue to rise and put pressure on banks, it furthers the argument for rate cuts.
But we wouldn’t bet on that either. Bankruptcies were at a similar level in November 2016. The Fed went on to increase rates another eight times in three years…
And the S&P 500 gained more than 30% over that time. So, who knows what to think?
He Sees the Future
When it comes to forecasting stock prices, we wouldn’t bet a fake penny on the Fed’s abilities. There’s only one man we trust: Phil Anderson.
We’ve followed Phil’s work for more than 10 years (probably closer to 15 years now that we think of it).
What we’ve figured out over that time is that he has an uncanny ability to ignore the noise of prognosticators (including folks such as your editor). Instead, he focuses on what he says is the biggest driver of markets — the 18.6-year real estate cycle.
Not only has that helped him call pretty much every market “pivot” for the past 35 years, but he’s nailed the market action for this year. When we met with him in November 2022, he said the market would end the year higher from that point.
When we asked him about 2023, he told us this year would be a good year for stocks… and he categorically told everyone who would listen that there would not be a recession.
Remember, this was a time when every “talking head” on TV or online was certain there would be a recession in 2023. There hasn’t been, and now folks have come around to Phil’s way of thinking.
On April 23 this year, Phil recorded a video for his subscribers where he told them:
Now this is really important in my humble opinion…
If a stock like Brambles involved with worldwide shipping is making new highs, you just cannot call a recession. And I just find that I can’t call a downturn when I get stocks like Brambles, Indeed, BHP, and Rio Tinto up near all-time highs.
As it happens, the Brambles (BXBLY) trade didn’t work out as planned for him. His risk management approach stopped him out for an 8% loss.
But another one of his trades also focused on the housing sector, M/I Homes (MHO), helped him secure his subscribers a 52% gain. Pretty good for a time when everyone was predicting a collapse in the housing market and a “certain” recession.
His current best open position is also on a housing-related stock. He’s currently up 32% on that trade… and it looks as though it has strong momentum behind it.
The reason we mention Phil is that at 7 p.m. ET today, he explains exactly where the market is headed over the next two years… why it will happen… and how you can play it.
Phil has genuine market insights, backed by decades of research. Go here to enroll for the presentation and see if you agree with me about his character. We’ll be surprised if you don’t.
More Markets
Today’s top-gaining ETFs…
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iShares U.S. Home Construction ETF (ITB) +6.1%
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SPDR S&P Homebuilders ETF (XHB) +5.6%
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iShares MSCI South Africa ETF (EZA) +5%
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SPDR Kensho Clean Power ETF (CNRG)8%
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KraneShares Electric Vehicles and Future Mobility Index ETF (KARS) +4.5%
Today’s biggest-losing ETFs…
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Invesco KBW Property & Casualty Insurance ETF (KBWP) -2.3%
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SPDR S&P Insurance ETF (KIE) -1.9%
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WisdomTree Japan Hedged Equity Fund (DXJ) -1.8%
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iShares U.S. Insurance ETF (IAK) -1.6%
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iShares US Consumer Staples ETF (IYK) -1.5%
Mailbag
If you have any questions or comments for our experts here at Legacy Research, we’d love to hear from you.
Write to us at [email protected] and just type “Daily Cut mailbag” in the subject line.
Cheers,
 |
Kris Sayce
Editor, The Daily Cut
P.S. Thank you for your patience while your editor was unwell for a couple of days. We assure you it had no connection to all the negative emails we’ve received in our inbox. [wink]