While the Fed’s narrative hasn’t significantly changed over recent meetings, the market’s expectations for rate cuts as early as March may need to be reassessed in light of the economy’s performance at restrictive levels.
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All right, Bill, I wanted to get your take here on the fallout from the Fed. A little bit more hawkish than maybe the market wanted at this point, but I don’t think they’ve changed their narrative or tone over the last several meetings. I mean, Fed Chair Powell was a little more dovish in December, but he’s been basically telling you that, hey, the economy’s doing great at these restrictive levels.
So maybe the market, you should reassess your outlook for rate cuts as early as March. Yeah, I mean, looking in hindsight, that December meeting, he did take a bit more dovish tone than maybe he even wanted to. And but it did get the message across that they were transitioning away from from that hawkish bias. And they officially removed that hawkish bias yesterday.
But that was really widely expected already. So we’ve called this in years recent. We call the Jekyll and Hyde effect, where they sort of use this balancing effect to really kind of keep investors, market participants on their toes. And yeah, I think, again, in hindsight, the way the market interpreted December had started pricing in seven cuts immediately. That was a little overzealous for the Fed.
So they wanted to rein that in. And I think the market was really in line with everything that had said, even though the state was a bit more hawkish than expected until he dropped the bomb on really pushing out those rate cuts from March out to the spring. And if you’re an investor, this really doesn’t change much if you’re an investor.
Yeah. You know, March moves to May. You know, we’re heading into a little bit of a seasonally bearish type of time of year. Just just quietly bearish. Not not even not even over over bearish year. But if you’re a trader, there’s obviously opportunity that derives from this. Yeah. The optimism in the equity markets going into this, the wealth effect that it’s created, some of the data that we’ve gotten, whether it’s consumer sentiment, consumer confidence, numbers on the rise, wages keeping up with inflation at this point, jobs market robust.
I mean, he kind of laid out the plan, didn’t he, Bill, that, hey, don’t get over your skis at this point. I think maybe they thought thought the equity market is at this point and investors should take heed to that because if you look at the valuation of the S&P 500, it’s getting stretched here. Yeah, no, I mean, talking about the data first, it’s really waffled around.
I mean, we haven’t seen any decisively break into the negative territory. We haven’t seen any, you know, really I mean, obviously, jobs have remained pretty pretty steady, higher than expected. And, you know, I think if you look at more recently, we saw the jobless claims sort of bounce back up. Looking back two weeks ago, I was saying that that jobless claims number that came in at 187, I think it was that’s going to be a low print for months to come.
We look at the ECI number for quarter four that came out employment cost index yesterday ahead of the Fed. That came in a little slightly lower than expected, 990 basis points versus 1%. So we could start to see this evolve. And maybe that’s really what that your pal was was acknowledging yesterday, where we’re starting to see maybe maybe the labor market cool off a bit and they need a little more time to interpret the data that comes.
We see of non-farm payroll coming Friday. ADP payrolls yesterday that I mean, really has done its own number relative to non-farm payroll. They haven’t been and in hand. And that number came it’s missed I think five of the last six months. So I think we’re maybe starting to see a little bit of a rollover in the labor market potentially, and that’s what the Fed wants to see.
But here’s the deal. Inflation, we’re starting to see disinflation. Inflation’s really coming down. A good PC numbers getting down to a to handle well look at the the rolling six months it’s like something 1.8 the Fed is accomplished their goal with inflation and you know you hear a lot of people talking about you know don’t they Should it let up now?
I mean, really, the people that are saying that are people that want to see pain in the market, if you take a step back, if you want to see a recession, you keep real rates hanging around 2%, the highest level. This is ten year real rates. When you have the ten year yield minus inflation, highest level since 2007, right before the great financial crisis.
If you want a recession, you keep real rates here. So ultimately, the reality is they want to bring they want to cut rates. They’re just waiting for a little more evidence here. Yeah, I agree with that. I think that was the consensus among the Fed. Even in the voters, they expect to cut rates. The markets are getting a little bit ahead of itself at this point.
But when you look at the equity market and the optimism that’s there, you know, breaking over the 4900 level for the S&P 500 seemed like it was tractor beam into 5000. I think that’s one of the concerns for the Fed at this point, This this push into risk assets where, hey, maybe earnings season is going okay. It’s not blowout and spectacular, but the bar is really high here.
Bill, Is there still room to the upside for the S&P 500? Because I think that’s what everybody’s waiting for, that pullback so they can get back in. But if we have that pullback, maybe that’s due to the fact that, hey, maybe earnings aren’t as great. Maybe the multiple in the sp500 shouldn’t be this high. And that’s a great question.
I do think that a consolidation here is very, very healthy. If you look at in an election year, you know, second half of of February tends to be a little bit of a pullback, You know, coming out of some of the exuberance in January traditionally can bring a little bit of a pullback in February. I think maybe the second worst month seasonally coming into February.
So, yeah, I think I think consolidation here would would be healthy. Holding ground would be healthy at the end of the day, you know, what we’ve saw come out from AMD and Nvidia, a lot of the air names that really rallied strongly led this market higher is we already had the earnings beats. I mean, we really priced that in already.
So if I look back and look back at in video in August of last year, it was a great number, but it didn’t trade higher and it went sideways, didn’t do anything for six months. And then we finally broke out in January. I think we could be going into a period like that right now where we we have salary reports.
I mean, Microsoft and Alphabet. Microsoft is a little underwhelming, but Alphabet wasn’t good. I wouldn’t be surprised to see three decent reports today between Apple, Amazon and Metta. But do they actually trade much higher? I have a little bit higher hopes for for Amazon at this point. But but what’s going to lead the market higher and that’s the real question here is if the market are priced in the stronger than expected results, then it would make sense to see us consolidate.
We would have to see some of the cyclicals really wake up. And before yesterday we had some of the financials starting to do some really good things. Bank of America was trading really well. The Russell 2000 actually, I mean, was actually trading higher through the middle of the session. It hasn’t been able smallcaps they would open higher from an overnight trade and they get slammed.
We actually traded higher earlier in the week during the session. So there are some parts of the market industrials are doing very well. You look at Caterpillar hitting 52 week highs, United Rentals, a blowout report, and we got some really great things taking place within the market. But we’re going to have to have new leadership to take us higher right here, right now.
Yeah, that’s definitely true there. And I like your thought process because we’ve been talking about that on other shows, that high bar, low bar during earnings season, you know, maybe a little bit of profit taking on some of these companies that it rallied. AMD’s a perfect example Google Alphabet also which jets hit all time highs metal platforms just off all time highs going into the report Amazon elevated at this point to going into the report So high bar set here.
All right. Great break down for us, Bill. Appreciate it. Have a great day. Thank you, you two. All right.
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