Video: Our Take on PCE, What to Watch in DC, and Putting More Capital to Work

In today’s Daily Rundown, Chris Versace discusses the crosswinds of the better-than-feared November PCE data vs. the looming government shutdown that has injected a fresh round of uncertainty in the market. He explains why even though the market may like what it saw in today’s November inflation figures, it isn’t likely to sway a more cautious Fed. 

He then shares what he thinks the Fed will want to see to deliver the next rate cut. With a deeply oversold market and investor sentiment flashing “Extreme Fear,” Chris talks about what could lead us to put even more capital to work for the portfolio.

Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here. Friday, December 20, end of the week, end of the last full week of trading for 2024. Hard to believe, but here we are. Before we talk about the day ahead, let's just quickly recap what happened yesterday. As you probably saw, the market was looking to move higher, attempting to recover some of the ground that it lost after the Fed's policy meeting. Ultimately, the S&P 500 notched a modest move lower.

Now, when you woke up this morning, you may have seen equity futures down rather large. Reason for that. Well, the House rejected the bill endorsed by President Trump that would have seen the government avoid a shutdown early tomorrow morning. Now, we've seen the futures rebound, but still in the red. What's going on? Well, we received the November PCE data, and it's fair to say that it wasn't as bad as feared-- kind of like what we saw with the November CPI report.

So let's take a look at the data. Headline PCE did rise to 2.4% from 2.3% in October, but it missed the higher expectation of 2.5%. So again, a little better than expected. Core PCE stayed put at 2.8%, unchanged on a year-over-year basis compared to October, and here, too, a tad better than the 2.9% figure that the market was looking for. However, that 2.8% figure back-to-back October, November, it's still higher than the data over the preceding five months.

Now, there was another nice surprise in the data. And it was the PCE services price index x-energy rose just 0.2% sequentially, a nice downtick compared to the number in October. It was about half that figure. So another relatively positive data point, especially on an area that the market and the Fed is very focused on when it comes to inflation. So that's the good news on that data point.

The not so good news is that data-- again, the PCE services price index x-energy-- tends to be volatile on a month-to-month basis. So as we push back from the report and take it in full, as they say, we would characterize the November PCE data as nice to see, but it's not going to sway the Fed that, as we know, has become increasingly more cautious about the pace of future rate cuts. Again, better than expected, but not exactly moving in the right direction just yet.

The bottom line is we are going to need to see more data moving in the right direction. And what that really means is we're going to want to start seeing year-over-year declines in some of the data that we get on a sequential basis. So we'll want to see, for example, December data coming in slightly lower than November data, whether it's for CPI, PPI, or the PCE price index. As we start to see that unfold, should we, then I think the market will start to get a little more excited about the potential pace of rate cuts in 2025.

So we'll have to continue to watch that. There's going to be a lot over the next couple weeks, candidly, the next few months, because even if we see one or two numbers tick lower, we know the Fed is going to want to see this develop on a sustained basis. To me, this says that the odds of a rate cut in January or potentially even the first quarter on the low side, but again, we'll have to follow the data and update our thinking as we go.

Now, the next item on our radar as we close out this last full week of the year is the potential vote later today to pass a bill that would avoid a government shutdown. Now, we're hearing some reports that we could see one later this morning, potentially this afternoon. I think a lot of folks want to figure out a deal that will fund the government and avoid a shutdown, especially during the holiday season.

There is also the idea that, in many respects, what happens with the government shutdown could be a litmus test for the Trump agenda and his ability to pass things and just get things moving on his agenda items. So this will be an interesting thing to watch. The way I think about it is if we do see a deal pass, then we could see that uncertainty be removed. And with that better than feared November PCE data, we could see an oversold market try to claw its way back.

If we don't see a deal and we move to a government shutdown, it's likely going to be the equivalent of throwing another log on a nervous stock market fire, unfortunately. I will share that the fear and greed index is in extreme fear this morning. And when we couple that with a market that's being simply extremely oversold, if we get some positive news, we do have the potential for the market to react like a coiled spring, starting to snap back. I would also say that we do have a triple witching day today, which, as we discussed yesterday, means volatility and volume will be bigger than usual.

Fortunately for us, following our exit of PepsiCo shares yesterday, we do have cash on hand. And as we discussed yesterday, we plan on being disciplined buyers. I will share with that in mind that we do have several holdings in or near oversold levels, and that makes for attractive pickup points, especially if their tailwinds continue to remain strong. Remember, as we talked about in yesterday's video, too, that a lot of what we're seeing is kind of irrespective of end market fundamentals. So what we will be doing is kind of matching up strong end market fundamentals, reset stock price valuations, and stocks that are potentially oversold. And that's how we're going to be potentially putting some cash to work if we get some good news.

So the message here, my friends, is let's see what dev-- let's see-- excuse me-- what develops today and potentially over the weekend, because we have had a government shutdown in the past that lasted a day or two before something was struck. So we'll continue to follow it. And as we put the finishing touches on the monthly roundup that will be hitting your inboxes later today, I will say, keep an eye on your emails and your alerts, because we will be breaking things down for you and with you as they develop. And of course, if we make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.