Two of Our Rate-Sensitive Holdings React as Powell Forecasts Caution

The stock market has strengthened throughout the day, hitting record highs in the process. That has landed the Nasdaq Composite officially into overbought territory with a relative strength index (RSI) above 70. The S&P 500 is not far behind with its RSI level of 69.51. As we’ve mentioned this week, fear of missing out (FOMO) has returned and we are in a seasonally strong time of the year. That over-enthusiasm can lead some to overlook developments that the market would usually latch on to. One such item would be Fed Chair Powell’s DealBook Summit comments on Wednesday about the economy, inflation and monetary policy.

During the interview led by DealBook’s Andrew Ross Sorkin, Powell touched on a variety of subjects ranging from the Fed’s independence to how the Fed thinks about potential policy changes like tariffs and crypto. Just over the halfway mark, Sorkin’s questions turned to the economy and inflation, with Powell sharing that the economy is far stronger than the Fed thought it would be back in September and inflation is higher than expected.

In analyzing economic data over the last few months, that has been our thinking — the economy is in a good place and inflation data has been moving in the wrong direction, suggesting it is stickier than previously thought. Our thought has been that after delivering 75 basis points in rate cuts over the last two policy meetings, this could lead the Fed to deliver a policy pause later this month. Powell shared that the Fed can afford to be more cautious as it finds the neutral rate of monetary policy.

That’s a tick in the December policy pause column. Remember, Powell is not going to deliver a specific message, but reading between the lines it suggests the Fed Chair is leaning more toward not cutting rates further in December than cutting them.

We’re seeing some reaction in our more interest rate-sensitive positions, like Builders FirstSource BLDR and United Rentals URI, but not in the overall market. So far, the reaction in the CME FedWatch Tool has been very modest. The probability for a 25 basis point rate cut on December 19 has inched lower to 75.5% from 77% early on Wednesday morning. This suggests that the market is going with the flow on Wednesday, but as folks reflect on RSI levels for the S&P 500 and Nasdaq Composite their focus will be on Friday’s November Employment Report and the other on the CME FedWatch Tool.

Based on the data we’ve assessed, especially on the inflation front, we would need to see a pretty horrible November Employment Report for the Fed to deliver a December rate cut. November data doesn’t suggest we’re likely to see that but we will need to keep close tabs on the data relative to market expectations of 214,000 jobs being added during the month and an Unemployment Rate of 4.2%, up from 4.1% in October.

With the Fed intending to get monetary policy back to a neutral level, we expect additional rate cuts to come in time and that keeps us interested in owning BLDR, URI and related shares. We still see 2025 as a very good year for construction as it benefits from lower interest and mortgage rates and multiple infrastructure and reshoring programs. This has us patiently waiting for opportunities to add to BLDR, URI and others.

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At the time of publication, TheStreet Pro Portfolio was long BLDR and URI.