4 Things I Expect Now That the Fed Meeting and Election Are Behind Us
Here are my takeaways from the FOMC meeting, including the most important thing Powell said, and the one asset class that has to be added to portfolios now.
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Pretty dull. That''s how I would describe a, not surprisingly, anticlimactic Fed meeting Thursday.
Seems like the main “excitement” of Fed Chair Powell's press conference was when he asked about if he could get fired or would step down. An unequivocal "NO" was the answer, but that was not an issue I’ve spent any time worrying about.
The market is pricing in about a 70% chance of a rate cut in December, and just over one cut by the end of January. Seems reasonable, though I’m leaning towards a December pause, but I don’t think that is a big deal at the margin.
The Fed continues to put off any decision on balance sheet reduction, which doesn’t seem to faze the market at all.
I think the most important thing the Fed Chair said is something that we have been saying for some time. They will model potential policy changes, but it is far too early to attempt that, since we really don’t know what policy changes might get brought up, what could pass, and when they would pass. I paraphrased him, but that has been my argument, primarily on the rates side of things, with FX in second place on that front.
Looking at the market, 10-year yields are back 4.32%, which seems much more reasonable than where they were Wednesday morning. I like 4.25% or maybe even down to 4.2% in the coming days, though I still think 2s vs. 10s will edge back to 25 in the coming weeks.
The DXY did reverse course nicely Thursday.
Stocks (and crypto, after a shaky start) continue to do well, though within stocks, Thursday it is back to the Nasdaq 100 leading the charge, with the Russell 2000 hovering around unchanged.
I did enjoy that Powell also had to discuss the QUITS rate, which is one thing we are eying on the labor front.
Bottom Line
Between the election and the Fed, I think we can make several assumptions:
- The Fed will continue to act to support the economy, at the risk of inflation (it isn’t quite what they say, but it is how it comes across).
- With a sweep, the new administration will be keen to nip any weakness off at the bud. Having said that, I think, it is far too early to price in massive fiscal stimulus, and maintaining the tax cuts, which will likely increase the deficit, doesn’t do much for spending as it primarily preserves the status quo.
- We’ve made it through earnings season, which typically means increased activity in stock repurchases, and we will get the largest company by market cap, reporting on the 20th, which seems like a lifetime away, now that we are back to seeing 1% moves on a daily basis.
- Seasonals should be good, and while we have seen some give back in the Russell 2000 and bank index Thursday, the case for the “laggards” (or what were the laggards until recently) remains strong. I think commercial real estate has to be added to portfolios now. Not only are corporations pushing employees back to the office (some happily, some kicking and screaming but with few other job options), but I think we could see the federal government under Donald Trump (and Elon Musk) do a big turnaround in work from home policy! We will be adding there and I think anything in and around chip production, rare earths, critical minerals (extracting and processing) and energy should continue to do well.
The Fed might not be as helpful as the market once thought, but it doesn’t need to be, if we can stoke the economy broadly.
