VIDEO: Why We’re Convinced the Fed Will Deliver Less Than Expected

In today’s Daily Rundown video, Chris Versace shares why the latest revision to the Atlanta Fed GDPNow model suggests that the market should not be expecting any big moves by the Fed on Wednesday.

"The market is trading high today ... but it is off its highs for the day," he notes. "It could be that folks are starting to have second thoughts about the Fed delivering 50 basis points tomorrow and signaling up to 250 basis points in rate cuts over the next 16 months."

Versace also discusses Friday’s "triple-witching" event and why it adds to our near-term cautious stance. He ends today’s video discussing Microsoft’s MSFT big dividend and buyback announcement as well as some favorable data points for Amazon AMZN as we head toward the year-end holiday shopping season. 

At the time of publication, TheStreet Pro Portfolio was long AMZN and MSFT.

Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here, September 17. And the market is trading higher today, once again, continuing the market rally. But it is off its highs for the day. And that could be because some traders are taking some quick profits, given the rebound over the last couple of days.

Or it could be that folks are starting to have second thoughts about the Fed delivering 50-basis points tomorrow and signaling up to 250-basis points in rate cuts over the next 16 months. It's that thought that the Fed could deliver such a big rate cut tomorrow that's been helping spur this recent market rally. As you know, the data that we've been seeing simply does not support the doom and gloom hard landing scenario that one would need to justify the magnitude of such cuts.

We talked with you an Alert earlier about the August Retail Sales Report and the August Industrial Production Report. And when we netted them out, we said we just simply don't see the need for such large action by the Fed. And lo and behold, we have since gotten the latest update for the Atlanta Fed GDPNow model, which includes this morning's two reports, and it moved higher to 3.0% for the current quarter, up from 2.5%.

Now, again, not going to say that the Fed is going to deliver a softball, but we just don't see the need for the Fed, given the economic data, to take such aggressive actions. If anything, they're more likely to take a more conservative, measured path towards rate cuts. They don't want to risk reigniting the economy to the extent that it becomes overheated or inflation. Well, that they wind up undoing, as Fed Chair Powell would say, all the good work that they have done in getting inflation down.

When we look at the core CPI, of course, still not exactly near 2%, but we'll let Powell have that. So when we take that likelihood and we mix in a few other things, one, the fact that the S&P 500 is flirting at that 5650 level that we talked about earlier in terms of it becoming overbought. We talk about a triple witching day this Friday, which means that things could get volatile. And for folks who haven't heard about triple witching before, it happens four times a year when we have three different types of financial derivative contracts expiring on the same day.

The three are stock options, stock index futures and stock index options. So we take a look at all of that, and candidly, we just start stacking up the chips of data and tallying them. And they suggest that being cautious as we move into the next few days is the likely move. There's simply no need to be a hero when the market is bumping up against all-time highs and the PE valuation is stretched. That is why we shared with you yesterday a table that not only updated consensus earnings expectations for the portfolio, updated and refreshed price targets and panic points, but we also included another column.

That column was potential price levels for each portfolio holding that, subject to market conditions, could make for a good pickup point for newer members and the portfolio for its less weighted holdings. Now, the thinking behind this is that we want to be prepared should the market trade-off in response to either the Fed delivering less than the market expects or things do get volatile spinning out of triple witching on Friday. But we also wanted to make sure that you were prepared as well, again, should the market have to reset expectations.

Before we wrap up today's video, let's discuss some other things regarding the portfolio. First, Microsoft, man, they came out with not only a 10% dividend increase, something that we've been waiting for because we tend to track the quarterly dividend payments and it wasn't lost on us that they hit the fourth payment at the same level that they've been paying for the prior three. And we do know Microsoft tends to have a increasing dividend policy, so that's good news. It adds a little more support for the stock.

But the company also announced a new $60 billion buyback program. And the way we think about this, the company is likely to do what it's done in the past and kind of chew through its program over the life of the program, meaning that it's another reason to think that compared with the continued growth in cloud, AI adoption, and what that means for Microsoft, not only for its cloud business, but for some of its subscription businesses and the PC upgrade cycle unfolding, there's reason to think that over the next few years, Amazon should be able to continue to deliver low-to-mid teens earnings growth.

So we do like that. We also want to talk quickly with you about Amazon. Yeah, we talked about it in our write-up about the August Retail Sales Report and how that confirmed our thinking on the company as consumers continue to re-embrace digital shopping. Clearly, that was a standout in that report. But there's two other big items to share.

First, Amazon has announced the dates in October for its big deal days. Now, you remember Amazon did this last year and they really kicked off the holiday shopping season arms race in early October, pulling forward the spending. And we've got a lot of comments about consumers being selective, discerning, trading down. And I think this is another attempt by Amazon to get out in front and start not only pulling forward the holiday shopping season, but allowing shoppers to kind of look for big deals as they do so, because that's the one thing that we're starting to notice a lot more in discounting sales.

And that could be-- could be a big event this holiday shopping season. The second thing we want to talk about here is that Deloitte is one of the first companies to come out with their 2024 Holiday Shopping Season Forecast. And Deloitte sees overall holiday sales up somewhere between 2.3% and 3.3% That's a little less than what we've seen in the last few years. But what really stood out?

It sees what it calls e-commerce or what we call digital shopping growing far faster, up 7% to 9%. Again, more thinking that that discerning consumer is going to look for ways to stretch their spending dollars. And of course, price comparison shopping between Amazon, Walmart, Target, and all the others, that's a real big positive of digital shopping. And of course, we continue to see that data point and that forecast being very beneficial for Amazon, but also for Costco in its growing digital commerce business.

I will say that again, Deloitte is one of the first. In the next few weeks, we will get probably a plethora of holiday shopping season forecasts. And we'll be breaking them down and kind of triangulating around them. And as we do that, we'll be pointing out what's similar and what's different. So for example, some folks, they define the holiday shopping season as November and December.

Others, it's November, December and January because of the big return season that happens after the holiday shopping, but also all the discounting and clearing out of product that happens in January. So when we break all these down, we'll be discussing the different ticks and tacks with you, and of course, what they mean for the portfolio and what they say about the consumer. So with that, folks, always please remember to check your emails, check your Alerts. We want to make sure you're getting our latest thinking. And if we make any moves with the portfolio, we want you right there with us. Thanks for watching.