VIDEO: How Today's Data Will Shape Tomorrow's Monetary Policy

In today’s Daily Rundown video, Chris Versace discusses how Tuesday's November data for Retail Sales and Industrial Production factor into Wednesday's Fed monetary policy decision. 

He also explains why recent stock market inflows and the market being short-term oversold could lead to a relief rally if the Fed’s outlook for rate cuts next year matches market expectations. Chris also runs through some Wall Street updates for Elastic ESTC and Dutch Bros BROS, and explains why we’re not overly concerned with Tuesday's move in Marvell MRVL shares ahead of Micron’s MU earnings later this week. 

Finally, he discusses some things we’re working on for the Portfolio that you may find interesting.

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace, here, Tuesday, December 17. And the market is trading off following a stronger than expected November retail sales report. I hope you saw our alert. That kind of broke it all down.

But it's that report tied with the rebound in manufacturing captured in this morning's November industrial production figures. And then we kind of factor in what we saw with yesterday's better than expected December flash PMI.

And it's kind of hard to argue about the health of the economy. It's performing better than anybody expected. We even heard that from Fed Chair Powell at the recent DealBook Summit, that the economy is performing way better than what the Fed expected back in September when it made its 50 basis point rate cut. And we've just continued to get more data that speaks to that, especially of late.

The issue here is that it's coming as the Fed starts its two-monetary policy meeting. And yes, we do expect the Fed to come out with its updated set of projections tomorrow and dial back the number of rate cuts that it sees for 2025. And here's the context for that.

Back in September, with its then-updated set of economic projections, the Fed telegraphed four 25 basis point rate cuts in 2025. Now, we look at the economic data we've gotten of late, both about GDP prospects, other PMI data. But we also take a look at the inflation data that we've been getting. And I touched on this yesterday, but also in the last several days in our alerts with you.

And the reality is that the Fed is going to bring down the number of rate cuts it sees in 2025. But, as we talked about with you yesterday, it's really whether or not the Fed delivers something that is in line with market expectations. That's now about one, maybe two rate cuts for next year. That's the latest, according to the CME FedWatch tool. And that, again, is what the market expects.

If the Fed delivers something that the market doesn't expect, that will be one thing. But let's remember that the Fed does want to get towards a neutral rate of policy. Yes, they may take more time, but it would take a lot for the Fed to go from four expected rate cuts down to something less than 1-- 1 or less than 1, let's call it. So I think the odds of the Fed matching what the market expects when it comes to 2025 rate cuts is pretty good.

At the same time, the market, with its trading off even further today, means it's moving deeper into short-term overbought. And at the same some time, over the last few weeks, we have seen a surge of money coming into the market.

Some figures from Bank of America Securities say that the stock market reported a sixth consecutive week of inflows totaling 7.3 billion. According to Bank of America, that's the third largest inflow since 2008 and the highest since October 2022. Other data from Morningstar says that US funds raked in $115 billion in November. Again, the highest total since April 2021.

Now we trace that timing back, and it's really kind of since the outcome of the 2024 election, the subsequent improvement in sentiment, prospects for tax cuts and a more relaxed regulatory environment under the Trump administration. And it's fair to say that folks are leaning optimistic, hopeful, dare I say it-- bullish. Now, that's the landscape.

But we have to recognize that given the strong year the market's had, there is likely some degree of FOMO, or Fear Of Missing Out, occurring. And being students of the market, we have to recognize that FOMO like that normally could lead to a market being overextended. But remember, as we sit here today, the market remains short-term oversold. And that means more folks are likely looking for opportunities than not.

Now, yesterday, we made a few moves, picking up some additional shares of the portfolio coming off the strength of what we saw in that December flash PMI, but also, what it showed for employment. But also, what it showed for renewed progress on inflation.

Now, as we wait for the Fed to come out and deliver what it's going to, engage the market reaction, we are going to keep our eyes and ears open, looking for fresh opportunities that includes harvesting some gains, potentially putting some capital to work ahead of what is likely to be the Santa Claus rally. And when I talk about harvesting gains, I am talking about potentially starting to unwind the portfolio's position in PepsiCo. So stay tuned. Check your alerts. That's what we'll be focusing and thinking on.

But let's also shift some gears and talk about some housekeeping items for today. Coming off that stronger than expected November retail sales report and the pop that it confirmed in digital shopping, we boosted our Amazon price target to 260 from 240. We also lifted our panic point.

Waste management came out with a 10% dividend increase that moves its quarterly dividend per share to 82.5 cents, or on a full-year basis, around 3.30. That's a nice bit of news after we scooped up more shares of waste management yesterday. That means we have a little more dividend income for the portfolio over the coming year

As it relates to the shares of elastic, Morgan Stanley came out and initiated coverage with a buy rating and a 130 price target. Now, we've told you that as the shares kind hover around the $100 level, we might look to revisit our current rating, and we are continuing to keep an eye on that.

And then finally, we had another price target increase for Dutch Bros. Jefferies joined the group, raising its price target to 60 from 45. Now, our current price target is a little higher than that 45 level, but we have admitted that we do need to revisit our Dutch Bros price target, but we're going to wait until we hear a little more about the company's 2025 food efforts.

Remember, they are starting to make a bigger push into food. That should start in 2025 and grow further 2026. Our thinking here is that when Starbucks did this more than a decade ago, it was a real positive for them, helped drive not only traffic, but average ticket size. We could see that unfold again with Dutch Bros. And that's an opportunity that we would want to capture, especially as Dutch Bros continues to expand its overall footprint in the US.

And one other item-- you're likely seeing some pressure in Marvell shares following the simply outsized move that they've had of late. We are aware of this. But remember, there are multiple tailwinds blowing for Marvell, not just AI and data center, but also, the rebound as we've talked about in its carrier infrastructure and enterprise networking business. All of these are going to be influenced by AI adoption, both in the enterprise and in the world of connected devices.

We expect to hear much more about this at upcoming 2025 CES in early January. And remember, our thinking is that as enterprise adoption rises, and as more of these AI-enhanced connected devices, smartphones, PCs, tablets, and the like, it's going to drive greater network utilization rates. That means we're going to see a rebound in capital spending. Because, as we've heard from even Oracle recently, that networks will need to be addressed amid rising AI adoption. So that's our thinking on Marvell.

And I'd also point out that later this week, we do have quarterly results from Micron. And I suspect that what Micron is going to say will really speak to what I just shared with you about AI adoption and network capacity, particularly when it talks about its outlook for 2025 for AI PCs, AI-enhanced smartphones, and other connected devices, as well as data center.

While we wait for that, coming up, we will be doing some catching up on our own. This afternoon, we're going to revisit some panic points in an alert with you. I also wanted to share that we're going to continue to tinker on our contender list. So we'll have more things coming for you this week and next week on that.

And we're also working on something-- something between a subscription and membership business model piece. That might take a little longer to fine tune. But we've talked a little bit about the positives of membership business models as it relates to Costco. We touched on it recently with American Express. And we're formulating some larger thoughts on that. Again, that might take a little more time for us to crystallize, fine tune, put together.

But I will say that the work on that is not going to stop us from holding our last set of office-- our last set of portfolio office hours. That's right. Sorry for being tongue-tied. We will have a set of portfolio office hours today, 4:00 to 5:00 PM in the forum. I hope to see you there.

And, again, yes, that will be our last set of portfolio office hours for 2024, just given how the Christmas and New Year's Day holiday fall. But with that I will say I'll see you during the office hours today again in the forum.

But before then, or between now and then, be sure to check your emails and alerts. We want to make sure you're getting our latest thoughts and any actions that we decide to take with the portfolio. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long ESTC, BROS and MRVL.