The Dividend Cafe - The DC Today - Wednesday, January 31, 2024

Episode Date: January 31, 2024

Today's Post - https://bahnsen.co/4bhe01g The Fed today did as expected, which was nothing, leaving rates in tact for what has now become a six-month pause. Chairman Powell reiterated the unlikelihood of a rate cut in March (more on that in a moment). Markets sold off with the Nasdaq especially getting pummeled (but it was already down over -1% on the day before the announcement. BUT, bond yields COLLAPSED, with yields dropping significantly making it a rare day (in the last year or so) where bonds rallied huge and stocks sold off quite a bit. The Fed futures moved down to 35% for a rate cut in March but I have to say that is shocking. I would have thought they would go to 0% (okay, more like 10%) with the Fed Chair kind of saying they are not cutting yet. My best guess is enough actors in the market just believe the inflation data will come in so improved and economic data will come in so questionable between now and March 20 that the Fed will change their minds. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Well, hello and welcome to Fed Day. Fed Day is the best day, always, here in the DC Today. When I say it's the best day, it doesn't mean it's because markets always go up. In fact, far more often than not in the last couple of years, Fed Day has pushed markets lower, but that stuff doesn't bother me much for rather obvious reasons. Today, markets did come down, and I want to explain some stuff because the bond market rallied huge, and the stock market got hit, and there's some nuances that are, I just don't want you understanding it from the press. That's, by the way, a universal statement of fact. I don't want you to understand stuff from the press. Okay, so Chairman Powell did basically say,

look, we don't think we're cutting in March. And he obviously used the normal Fed speak language he would need to use to say that, which included the openness of something potentially changing. But he did a very good job, I think, telegraphing to markets. We don't think we're going to be in a position to be cutting in March. And yet we see this path of easier policy. They took out a lot of the restrictive language, even from the December release. And it's all in the trajectory that we've certainly expected it would be. Futures had already come from 80% probability of a cut in March down to about 50.

But here's the thing that's fascinating. They only closed today at a 35% probability. I would have thought I'd go to zero or really not zero because, you know, it's tough to get there in this environment when there's certain situations that could very well see them cutting. But I would have guessed it would have collapsed down to 10 percent implied probability of a rate cut in March. percent probability of staying still at the March 20th Fed meeting, which keep in mind, it's seven weeks away, versus 35 percent saying that there will be a cut in March and we're still at virtual certainty of cuts in May. Why is the futures market not responding more certainly? And I think the best answer is that there's enough actors in financial markets that just don't believe them, that think inflation data could get so much better in the next two months and other economic data so much worse that they do end up getting forced to cut rates sooner.

I'm positive that there's some in there that may be wanting to hedge on some sort of political thought that they just within this election year may decide to go sooner than later. Not that the Fed is doing that. I'm talking about the futures market trying to read what the Fed may or may not do. But then the 10-year today, the 10-year yield fell 14 basis points down to 391. I mean, you're almost down back to the 380 lows in December. Massive rally in the bond market, even while the Dow dropped over 300 points. Now, 300 points is only 80 basis points, but the Nasdaq was down 2.2% in one day.

That's, I think, the worst day it's had all year. There may have been a worse day at the very beginning of the year, and the S&P was down over 1.6. But the Nasdaq was already down about half of that before the Fed spoke throughout the whole day when the Dow was up. And the reason being that Google had gotten hit hard and communication services today closed down 393 basis points. So if you're going to have communication down in one day 4%, then naturally you kind of expect this is on the risk-off tech side. The defensive sectors of the market, every sector was down today, but healthcare was only down 11 basis points. I think utilities were only down 18, and consumer staples were down maybe 50 or so. But it was the high beta tech stuff that got hit pretty hard. I think utilities were only down 18 and consumer staples were down maybe 50 or so.

But it was the high beta tech stuff that got hit pretty hard. Oil was down 2.5% today, but still sitting there at the $75, $76 range. And that was kind of the story. So very, very few days. In 18 months, 12 months really, where the bond market rallied and the stock market sold off to these kind of degrees. And so I think a lot of ways it's healthy. There's obviously nothing surprising about this, this idea of enhanced volatility around the stuff of the Fed. They will, they won't, they what they do. That was a major thing of what we've been writing. And I don't think it's anywhere near done. I think this continues for some time. But again, for those of you that are not looking to try to guess a specific outcome on a specific day and trade around it in a 24, 48, 72 hour period,

I would just simply say that this is the most irrelevant thing I could possibly think of for a real investor. The Fed is going to be cutting rates this year. They are done hiking rates. Right now, we are doing this and evaluating this in the midst of an economy that is clearly not in a recession. Inflation has come way down. These are things that matter when you think about how to weigh earnings. These are things that matter when you think about how to weigh asset classes. And I believe that you know what you need to know, that the Fed will be easier, not tighter this year. March, May, I didn't care before today. I care just the same now.

And ultimately, I think that if we get a better reverse correlation, non-correlation between stocks and bonds, I think that is better than a direct correlation, just to the extent it helps make a healthier outcome in asset allocation. I'm going to leave it there. I believe that that's covered the basic news for the day. The ADP jobs report came in pretty soft. 107,000 private sector jobs versus 150 expected, but that has not been a great foreshadowing for what the BLS data comes in on Friday. You get a weak jobs number Friday. I will not be surprised if futures probability of a Fed cut in March does go higher and if stocks rally. That's the stuff I hate more than anything,

when bad news becomes good news because of Fed distortions. I'll leave that alone. There is an Ask David in the DC Today that you ought to check out online. And Brian Seitel will bring you the DC Today tomorrow on Thursday as I go for a 24-hour trip to Miami for a dinner speaking event tomorrow night and a morning speech at the Miami Economic Forum Friday morning before coming right back here to New York City. Thanks for listening. Thanks for watching. Thank you for reading the DC Today. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. Advisory services are offered through Hightower Advisors LLC.

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