The US Feds just signaled a 2025 pivot. What this means for our portfolios...
Markets: Today’s FOMC meeting and Chair Powell’s press conference
Well, it was supposed to be just another US Feds’ meeting with a 0.25% interest rate cut all but factored in. But that's not all that we got today…
Leading into this FOMC meeting, markets were frothy, crypto was ripping, meme stocks were running and everybody was in a bullish mood. Bears were scarce and bulls were aplenty.
Nobody expected Chair Powell’s press conference to throw as many grenades as he did. By the end of the day, the damage was done.
Bitcoin dropped 5%, the US dollar index rose to its highest level not seen in 2 years, long-term 10-year interest rates crossed the 4.5% level, the SP500 lost 3%, the Nasdaq gave up 4% for the day and the Dow Jones lost 1,100 points, its 10th consecutive day lower.
All eleven SP500 sectors recorded losses, ranging from -1.4% in health care to -4.7% in consumer discretionary.
The VIX volatility index spiked more than 50%, its largest daily increase ever.
Markets had erased about 1 month’s worth of progress. It was the biggest intra-day drop all year.
A good ole’ fashioned flush that no one was expecting. Only 2 stocks in my portfolio were green for the day. A trading community, that I follow, was just besides themselves… they could not believe how the US Feds had just gut-punched them… last I checked, they were still rage chatting…
Amidst all this carnage…among all these numbers…what interested me the most was that the FOMC may have just given us an updated roadmap for 2025. A guide to how they think 2025 is gonna play out.
They are worried about the resurgence of inflation.
They are concerned about the impact of tariffs that the new US administration has been threatening.
They believe that the US jobs market is healthy and may not need as many rate cuts as they originally thought.
They did not rule out a rate hike next year if warranted!
One of the most important signals we got was that it was almost touch-and-go during the FOMC meeting as to whether they would even cut interest rates today.
Imagine if they hadn't thrown out today's 0.25% rate cut.
So given this new information, the question now is:
What is likely to happen in markets next year?
As an investor, trying to gauge how the economy, how stocks and bonds are likely to perform in the coming 12 months is crucial to guiding us on where and how we invest.
I believe that as of today, the US feds are signaling a new monetary policy regime and, as investors, it behooves us to pay attention.
One of my readers asked a very interesting question on the chat line today, “so is it back to the Mag-7 stocks then next year?”
P.S. Every question, imo, is either interesting or not so interesting. I never classify them as good or bad or stupid.
Anyways, I think this question is worth considering…in the sense that we need to figure out where we're gonna put our money to work going forward.
If interest rates are going to be stagnant until say the middle of 2025 then which markets and assets will thrive next year and which will not?
Are large-cap stocks, that have healthy cash balances, going to stay bought because they don't need to access market liquidity as much as their mid-cap or small-cap brethren?
Will crypto continue to rise if access to easy margin and liquidity becomes more difficult as borrowing rates stay elevated? Does the crypto-friendly Trump administration change this equation? Are they really as crypto-friendly as we think they are?
In this new regime, what will happen to value stocks…and to bonds…and to gold…and to mortgage rates…and housing…and consumer spending…and business conditions…
For now, we need to get through this week’s massive $1.6T options expiration, the biggest ever in the history of the US markets. Then we need to see how markets will perform through the end of the year and into the first week of January.
There will be many confusing signals over these next 2-3 weeks that will make it difficult to get a read on 2025. So we have to be patient, wait, watch and learn.
We need a few more weeks of macroeconomic information. We need to see the new US administration in action. Heck, even CEOs that will report Q4 2024 earnings and provide 2025 outlooks are going back to the drawing board now. Let’s give everybody and everything some time to marinade over what just happened.
If you were an investor in 2022, you know how consequential the US Feds pivot to higher interest rates was for markets and for our portfolios. You know how important it was for us to pay attention to when the FOMC changed their rhythm of interest rate decisions. You know how our portfolios hurt badly that year.
We are at another such inflection point now.
2025 is going to be quite different from the last two years.
I am going to sharpen my pencils over the Holidays to update my market roadmap for 2025.
And in case you are wondering if I bought the dip…the answer is no. I am not buying until Monday next week. My shorts paid off nicely today and I have some cash to deploy…but I am waiting for the carnage to slow down before I deploy my dry powder.
Stay tuned.
Good timing for a thoughtful and calming newsletter
To me the most troubling part of the market reaction today was the rise in the 10 year, even before Chair Powell spoke the 10 year was rocketing up in yield. Then a 3% decline across the stock indexes… The Fed cannot cut any more if the longer bonds will go up on cuts on the short end. They used up all of their ammo.