All throughout this entire post-pandemic macro rollercoaster, we have heard from experienced veterans the now almost cliche saying of “don’t fight the fed”. So why would we?
The FOMC meeting last week (Mar 20) was what I believe to be one of the most important clearing events for the market in for the next leg of this rally. Up until last week, many were becoming cautious in the markets as SOXX, QQQ and SPY are all up double digits in just first 2 months alone. The repeated hotter CPI and PPI data certainly did not help and rate expectations and cut all had to be pared back because of this.
However… all of this is irrelevant now, because Powell basically told us the playbook going forward by being unexpectedly dovish. Where was this coming from? Is this sustainable? Why should we over think it? Is there anything we should be aware of to throw us off track? Let’s dive in!
The most important takeaway from the FOMC meeting is that despite a hotter than expected forecast, the Fed is sticking to their script of 3 cuts in 2024, a moderation of QT, and implied that rates have peaked for this cycle. This kills any tail risk of an unexpected hike, or any super hawkish action out of left field. Indeed, the entire meeting actually veered unexpectedly dovish with mentions of QT moderation and his belief that the hotter data we saw from the 2 previous months were an aberration.
Were the data really an aberration? Is Powell recklessly ignoring dangerous signals? Is this a clearly politically influenced move on a re-election cycle? Well, I am not a macroeconomist nor a politician. I am growth investor and portfolio manager and my goal is to make money. Don’t fight the Fed. Powell is telling us he sees the data and this is what he is deciding to do.
He decided that rates have peaked (he won’t hike any more) and he is itching to cut because conditions have adequately tightened. This can’t get any more clear. He is the chair of the Federal Reserve. He gets to decide the playbook and move the goal post as he sees fit (whether we like it or not). He will cut, this should buoy the market, stimulate growth, push up rate sensitive and risk assets. Hence, go long.
The only thing in my mind that could throw a wrench in this playbook is if we just keep getting repeated unexpectedly hotter data prints to the point that Powell has no choice but to walk back his actions. Given Powell’s clear vocalized stance, the bar would have to be high for that to happen.
Aside from the FOMC meeting the other important meeting the whole world watched last week was the NVIDIA AI Developer conference. On a purely technical level, the outcome is that the stock continued to end higher on its 11th week of consecutive rally. There is continued appreciation on their ability to innovate at the data center scale and the sheer breadth of their partnerships in the AI ecosystem. Net-net NVIDIA continued to reinforce their dominance in being a prime enabler in the generative AI secular wave.
Overall, I think last week was an important clearing event for the stock market. We will watch for PCE data this Friday (market holiday) to see if there are any egregious signs that can combat Powell’s playbook. Zooming out, the Fed’s decision to cut is not a reckless deviation in the world stage. Swiss National Bank started to commence its rate cut cycle last week already. Bank of England was dovish and laid the foundation for cuts. Why should we overthink this?
“Most major central banks, including the Fed, are set to embark on the most synchronized loosening cycle since 2008” (From Bloomberg)
Since the FOMC meeting, rates have certainly retreated, but still higher than when it troughed in Dec. 27 2023 (10yr was ~3.79% vs. currently 4.233%). S&P500 and NASDAQ continue to march higher, though movement in the more “growthier” / rate sensitive side was relatively muted and off their highs made back in early march before the hotter CPI and PPI data. I think as long as data readouts remain reasonable, this is a buying opportunity.
In a subsequent post I will detail key sectors and themes poised to be strong beneficiaries of this playbook and the next leg of the rally (assuming there isn’t data that gets Powell too embarrassed).
The market remains resilient. Despite 10yr yields inching higher this entire year, despite walking back 7 cuts to 3 cuts, despite hotter CPI and PPI data, the entire market is up over 10% in the first 3 months, semis is up 20%, Bitcoin and related crypto risk assets and altcoins have continue to make new 52-wk highs. Past this clearing event, I would buy on weakness.