The Fed, Rate Cuts, and Wall Street's Reaction

It's not good the Fed expects interest rates to fall in 2024 and 2025.

Author

Travis Hoium
December 17, 2023

A programming note: I will publish a spotlight article for premium subscribers early this week and have a normal posting schedule through next weekend’s update. Asymmetric Investing will take December 25 - January 1 off but expect lots of updates to this site starting on January 2, 2023.

I hope you had a wonderful week!

The stock market certainly had a good week and the Federal Reserve is the reason why. Not only did the U.S. central bank keep short-term rates in a range of 5.25% to 5.50%, but officials said they expect three rate cuts in 2024 and further cuts in 2025. Bond yields plunged, stocks jumped, crypto popped, and the bull market is back…for now.

More on the Fed below.

What's Ahead

Before we get to this week’s story, I want to share some of our partners!👇

The tools available for investors today are amazing and these are the sites I use every day while doing research:

  • The Motley Fool — I contribute to The Motley Fool in part because of their investing track record. The Motley Fool Stock Advisor returns are 509% as of 12/7/2023 and measured against the S&P 500 returns of 133% as of 12/7/2023. And they’re giving away the Top 10 Stocks to Buy Now right here.

  • Finchat — Pictures are worth 1,000 words and Finchat makes investing visuals easy. You’ll see Finchat’s platform in most articles on Asymmetric Investing.

  • Quartr — Quartr is the only way I listen to conference calls and investor presentations. So easy and you can start for free here.

  • Koyfin — Koyfin is like having a Bloomberg terminal without the price tag. Charts, data, transcripts, and more are all in one place.

In Case You Missed It

Here’s some of the content I put out this week. Enjoy!

  • The $700 Million Contract: Baseball went crazy this week with Ohtani’s $700 million contract. There are strange details like massive deferrals, but the bigger takeaway is how big a risk this is for the Dodgers as cable and regional sports networks decline.

  • Gemini and Sustaining Innovation: I covered why I think artificial intelligence has already proven to be a sustaining innovation.

  • How Coca-Cola Really Makes Money: Coca-Cola doesn’t sell many cans of soda, it sells sticky syrup. Here’s a look at how the business works.

  • Bill Ackman’s Pershing Square Owns Just 7 Stocks: Ackman is one of the best investors of our generation and his portfolio is incredibly concentrated. I dug into the seven stocks he owns right now.

What the Fed (Really) Said

I want to preface what I’m about to say with a few things:

  • I’ll continue to invest monthly in stocks from the Asymmetric Universe because I have no idea if the market will go up or down over the next few months

  • Optimism will be more profitable than pessimism long-term

  • Interest rates and the economy are unpredictable

That said…

Short-term, lower rates are great for the market. Interest rates are often used to discount future cash flow in company models, so lower rates are good for stocks in a vacuum. That’s why this week the market took this sentence and ran with it.

If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6 percent at the end of 2024, 3.6 percent at the end of 2025, and 2.9 percent at the end of 2026, still above the median longer-term rate.

Chair Powell’s Press Conference, December 13, 2023

Wow! Rates are going to come down fast!

What I didn’t see was much analysis of why the Fed thinks rates are going to fall. That seems important.

Powell went out of his way to tell reporters the reduction in rates wasn’t a recession prediction because it’s just a survey of rate expectations, not what drives rate expectations.

But the data that’s making Powell comfortable holding rates steady and maybe cutting rates in 2024 are a giveaway.

Nominal wage growth appears to be easing, and job vacancies have declined. Although the jobs-to-workers gap has narrowed, labor demand still exceeds the supply of available workers. FOMC participants expect the rebalancing in the labor market to continue, easing upward pressures on inflation. The median unemployment rate projection in the SEP rises somewhat from 3.8 percent at the end of this year to 4.1 percent at the end of next year.

Chair Powell’s Press Conference, December 13, 2023

Translation: Unemployment is going to go up and wage growth will slow to a crawl.

Doesn’t seem great for the economy.

While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.

Chair Powell’s Press Conference, December 13, 2023

Translation: We expect rates to go down in 2024, but we are prepared to say “Just kidding!”

Jerome Powell could have said, “We think interest rates will fall in 2024 because the economy is getting worse and people have less money to spend outside of feeding their families and paying the rent. But we might change our minds in a few months.”

The history of rate cuts

As stock prices jump, I want to put out this final word of caution. The Fed doesn’t usually cut rates because the economy is booming. In fact, it does the opposite. Rate cuts usually start just before the fall.

I’m not going to predict the market, I’m going to keep to the plan of investing every month, but I’m going to keep valuations in mind and try to avoid FOMO. In other words:

I’ll let you know when I start to feel greedy.

Thank you for being an Asymmetric Investing subscriber. If you want all of my stock deep dives, stock updates, and access to Asymmetric Portfolio trades before I make them you can subscribe below. The premium subscription is what makes this newsletter possible. I appreciate the support.

Asymmetric Investing

Analyzing stocks with an asymmetric return potential of 10x (or more) over the next decade. Subscribe for access to the research and real-money portfolio.

asymmetric-investing.beehiiv.com/upgrade

What do you want more of?

Feedback helps Asymmetric Investing improve.

Login or Subscribe to participate in polls.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.

Reply

or to participate.