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In recent economic news, the Federal Reserve (the Fed) has made a significant decision to cut interest rates. This move has sparked discussions and debates among economists, investors, and the general public about its potential implications for various sectors of the economy. Let’s delve into what this decision means and how it might affect different stakeholders.

Firstly, let’s understand what cutting interest rates entails. When the Fed cuts interest rates, it essentially lowers the cost of borrowing money for businesses and individuals. This can lead to increased spending, investment, and economic activity, as borrowing becomes more affordable. On the flip side, lower interest rates can also impact savings and fixed-income investments, potentially reducing returns for savers and retirees who rely on interest income.

One of the primary objectives behind cutting interest rates is to stimulate economic growth. By making borrowing cheaper, businesses are incentivized to invest in expansion, hiring, and innovation. Consumers may also be more inclined to make big-ticket purchases like homes or cars, boosting sectors like real estate and automotive industries. This injection of spending can have a ripple effect throughout the economy, creating jobs and fueling overall economic activity.

Moreover, lower interest rates can lead to increased investment in the stock market. With borrowing costs reduced, investors may opt to allocate more capital to equities, anticipating higher returns compared to other investment options. This can contribute to stock market gains and positively impact portfolios for investors.

However, it’s essential to recognize that the impact of cutting interest rates isn’t uniform across all sectors. While some businesses and consumers benefit from lower borrowing costs, others may face challenges. For instance, banks and financial institutions may experience reduced profitability on lending activities, especially if they are unable to adjust interest rates on deposits accordingly. This can impact their ability to offer competitive rates on savings accounts and other deposit products.

Additionally, lower interest rates can contribute to inflationary pressures over time. As borrowing becomes cheaper and demand for goods and services rises, prices may start to increase. While moderate inflation is generally considered healthy for the economy, excessive inflation can erode purchasing power and lead to economic instability.

Another consideration is the potential impact on international markets and exchange rates. When the Fed cuts interest rates, it can lead to a weaker dollar relative to other currencies. This may affect trade balances, export competitiveness, and global investment flows.

Stocks have been enjoying some nice gains over the last three months. The major indexes have rallied with the Russell 2000 small cap index gaining over 16%.

Right behind the Russell 2000 is the NASDAQ composite at a little over 15% gains in the last three months. Trailing are the Dow Jones and the S&P 500.

After today, stocks have kicked off the week with some gains, but can it continue. The hopes for a Santa Rally seem to be alive this year because we missed it last year.

Markets have had a great 2023. Hopefully the gains will continue into next year with the Fed anticipated to cut three times next year.

Merry Christmas and Happy New Year to all my readers!

The Russell 2000 index has been on a tear over the last month with the much anticipated rate cuts announced yesterday by the Fed.

The IWM ETF which which tracks the Russell 2000 small cap index is up a little over 14% in the last month.

It’s about damn time!

Small caps have lagged large caps for almost two years. We will keep and eye on this throughout the year.

Let’s see what 2024 has on the docket for small caps!

If you’ve kept up with the stock and bond markets over the last few weeks, you may be wondering, “What the hell is going out there?”

You’re far from alone. Between inflation, war, and interest rates there’s no telling where we’re headed.

Most people thought we’d be in a much worse place, but the economy keeps chugging along!

The Atlanta Fed GDPNow Estimate is still tracking 5% growth for Q3.

It’s going to take more than interest rate hikes to push the US into recession! Stay tuned for PPI data coming out tomorrow.

The Hamas attacks are scaring markets, but I believe the fear will be short lived. Stocks fell on the Columbus Day trading day. Usually holiday trading volumes are low and today is no different.

Tomorrow will be a better measure of how markets price in this conflict. The bond market is closed today as well so tomorrow will give us a better rate picture.

Oil did surge 4% today.

Let’s see if the surge in oil will be temporary. The US consumer is still grappling with higher energy prices and this is not helping.

Market will add this conflict to the wall or worry.

There has been a ton of news about regional banking. And its for good reason, regional banks have been failing in the US with the most recent failure being First Republic Bank. Here are some of the reasons as to why they are failing.

1. Economic conditions: Regional banks may struggle in economic downturns, particularly if they have a high concentration of loans in industries that are particularly sensitive to economic conditions, such as real estate or energy.
2. Increased competition: Regional banks may face increased competition from larger banks that can offer more products and services, as well as from fintech companies that can offer innovative digital banking solutions.
3. Regulatory environment: The regulatory environment can also impact regional banks, particularly if they are subject to regulations that place a heavy burden on smaller institutions.
4. Technology: Regional banks may also struggle to keep up with technological advancements, which can impact their ability to compete with larger institutions and fintech companies.
5. Mergers and acquisitions: Some regional banks may fail due to poor management or financial difficulties, which can lead to mergers or acquisitions by larger institutions.

Above are some of the cliché reasons of why banks are failing but in reality, regional banks are failing because they have awful management. The people in charge of the regional banks do not care if they fail because they know the government will step in and save them just like in 2008. It really is a great business model. Start a bank and lend vast amounts of money while not caring about risk and all else fails, Uncle Sam with the help of the US Taxpayer will come and save you.

Let’s see if more regional banks continue to fail.

Bank earnings are coming in pretty strong despite the failure of Silicon Valley Bank and Signature Bank in March.

I do want to point out the two banks did fail toward the end of the first quarter which means the pain could be reflected in second quarter’s earnings. Let’s take a look at the chart below to see how banks have done over the past five trading days.

Banks were trading sideways until JPMorgan, PNC, and Wells Fargo reported on Friday. JPMorgan surged on Friday while Wells Fargo and PNC sat out that rally until participating on Monday’s trading day.

All the banks that reported on Friday delivered earnings beat, except PNC, missing on revenue 5.6B reported vs. 5.62B expected.

M&T Bank reported an earnings beat today and surged more than 7%

Let’s check back in tomorrow to see how Goldman Sachs, Bank of America, and Bank of New York Mellon do on earnings as those banks report tomorrow.

There’s been a ton of talk in the news about trade deals in other parts of the world, but let’s be real – do they really matter?

I don’t think so. The talking heads on the news keep talking about how other countries are diversifying away from the US dollar, but in reality, that doesn’t benefit them, especially China.

Here are some reasons why a strong dollar is not beneficial for China:

1. Currency Reserves: China is the world’s largest holder of foreign exchange reserves, which includes a significant amount of US dollars. A strong dollar increases the value of China’s dollar-denominated assets and helps to maintain the value of its foreign exchange reserves.
2. Trade: China is one of the world’s largest exporters, and a strong dollar can make Chinese goods cheaper for US consumers. This can increase demand for Chinese exports and help to boost China’s economy.
3. Investment: A strong dollar can also make US assets more attractive to foreign investors, including those from China. This can lead to increased investment in the US economy and help to strengthen economic ties between the two countries.
4. Debt Repayment: China is a major holder of US Treasury bonds, which are denominated in US dollars. A strong dollar makes it easier for China to repay its US dollar-denominated debt.

In addition, here are some reasons why the dollar will continue to be the currency of preference for quite some time:

1. Stability and liquidity: The US dollar is one of the most stable and liquid currencies in the world. It is backed by the world’s largest economy and the US government’s reputation for financial stability and fiscal responsibility. This makes it a reliable currency for international trade and investment.
2. Reserve currency status: The US dollar is also the world’s reserve currency, meaning that many central banks hold US dollars as a reserve asset. This gives the US dollar an inherent advantage in international transactions and makes it easier for foreign entities to obtain and exchange US dollars.
3. Large market for US dollar-denominated assets: The US has the world’s largest financial markets, including the New York Stock Exchange and the Nasdaq. These markets offer a wide range of US dollar-denominated assets, including stocks, bonds, and other securities, making it easy for foreign investors to invest in US assets.
4. Wide acceptance: The US dollar is widely accepted in most countries around the world, including those that do not use it as their own currency. This makes it a convenient currency for international transactions.
5. International trade: The US is one of the world’s largest trading nations, and many commodities, such as oil, are priced in US dollars. This has helped to establish the US dollar as the preferred currency for international trade.

Markets have some good data to price in off the printers this morning. Core PCE Price Index month-over-month (MoM), which excludes volatile food and energy prices, came in lower than expected at 0.3% versus 0.4% expected.

PCE Price Index month-over-month (MoM), including food and energy, came in lower as well at 0.3% versus 0.5% expected.

What does this mean? Well it means the Fed’s interest rate hikes are working – sort of. Inflation is still sticky and the Fed’s inflation war has taken a back seat to bank’s failing to manage balance sheet risk properly. The S&P 500 is set for a winning week and up on Friday.

Here is some more bad news on the Fed’s inflation war. US Personal Income has been below Core PCE since 2022. This means Americans are making less while prices are increasing.

You would think banks failing would cause bad returns in the stock market due to the economic and financial implications that result when banks fail.

But that’s not the case for Megacap Stock at the moment. In the last three months – Meta, NVIDIA, and Tesla have notched huge gains, with huge spikes around March 10th, the date Silicon Valley Bank announced its failure. Apple and Microsoft have had some good gains in the last three months, but not as much as the other names. Here is the chart below.

Now why in the world would the biggest market cap names rack up huge gains after banks are failing?

The above chart shows the dip in borrowing costs over the last month. Since the Fed’s fight against inflation has taken a back seat to financial stability, the cost to borrow money has fallen and led to a rally in high growth names that borrow a ton of money.

Tomorrow is a big day for economic data! I will be keeping an eye on jobs, GDP, and Core PCE. The Core PCE numbers will show if the Fed’s previous rate hikes have made any progress on inflation. If it comes in higher than 4.3%, the Fed may keep its foot on the hiking pedal.

So there’s been a ton of news about the failure of Silicon Valley Bank (SVB) and Signature Bank in the news. Let me tell you why it doesn’t matter.

Even though a bank failure is something that shouldn’t be taken lightly, the troubled banks failing are not mega banks like Citi, JP Morgan, or Wells Fargo. As long as one of these banks don’t go down we should be good. Unless all regional banks failed at the same time.

In addition, the government has stepped in and guaranteed all deposits for the troubled banks and the FDIC is using some of the insurance funds that all banks have to pay into to help out so no tax payer money is being used.

First Citizen Bank is buying a large portion of SVB’s deposits which sent the stock soaring.

Bitcoin has also been soaring due to the shakiness of the financial system. Some investors think Bitcoin will be stable in the event of financial system turmoil.

Long-term rates have come down with questions around if the Fed can still keep raising rates due to financial instability so the 10 year and mortgage rates have come down as well.

I’ve been meaning to write this article topic for a while. Nothing like getting a kick in the ass from Scott Jackson to pump this one out.

Let’s get started

The major US stock market indexes are a set of indices that track the performance of the US stock market. Here are the explanations of the most commonly followed indices:

1. Dow Jones Industrial Average (DJIA): This index is often referred to as “the Dow” and consists of 30 large, blue-chip companies listed on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow is the oldest index and tracks the performance of the US economy through the performance of these 30 companies. Most of the Dow stocks you will most likely be familiar with. Names like Coca-Cola, Disney, Apple, and Microsoft. Companies that are included in the Dow are very stable and usually considered the leader in their respective industry. When a company is admitted to the Dow it is a big deal as it is not easy and changes to the index do not happen frequently. Keep in mind this index is price-weighted. This means a certain stock could drag the entire index down. If a stock in the Dow declines by $10 in one day that single stock will be responsible for about a 70 point decline on its own. Here is a list of Dow stocks: https://www.cnbc.com/dow-30/
2. S&P 500: This index tracks the performance of 500 large-cap companies listed on the NYSE or NASDAQ. The S&P 500 is considered to be a more accurate representation of the overall US stock market, as it includes a broader range of companies across different sectors. The S&P 500 is not price weighted like the Dow is, it is market capitalization (market cap) weighted. This means the bigger the market cap of a company, the more its price increase/decrease effects the S&P 500. Right now Apple (AAPL) is roughly 7% of the S&P 500 boasting a $2.5 trillion market capitalization. This means when Apple increases or decreases significantly, it will have a huge effect o n the index. Link to all S&P 500 companies: https://www.slickcharts.com/sp500
3. NASDAQ Composite: This index tracks the performance of all the companies listed on the NASDAQ exchange, which is primarily made up of technology companies. The NASDAQ Composite is often used as an indicator of the performance of the technology sector. List of NASDAQ Composite: https://www.barchart.com/stocks/indices/nasdaq/nasdaq-composite
4. The NASDAQ-100 Index is a stock market index composed of the largest non-financial companies listed on the NASDAQ exchange. It is often referred to as simply the “NASDAQ 100”. The index includes 100 companies, which are selected based on a combination of market capitalization, liquidity, and other factors. Unlike other indexes, the NASDAQ 100 is not limited to US-based companies, and includes companies from various countries. The NASDAQ 100 is often used as a benchmark for technology stocks, as it includes many well-known technology companies such as Apple, Amazon, Facebook, and Microsoft. However, it also includes companies from other sectors such as healthcare, consumer services, and industrials. Don’t get the NASAG Composite and NASDAQ 100 confused. Link to NASDAQ 100: https://www.cnbc.com/nasdaq-100/
5. Russell 2000: This index tracks the performance of 2,000 small-cap companies listed on the NYSE or NASDAQ. The Russell 2000 is often used as an indicator of the performance of small and mid-cap companies, which are believed to have greater potential for growth than larger companies. Link to Russell 2000: https://www.barchart.com/stocks/indices/russell/russell2000

These indexes provide investors with a snapshot of the overall performance of the US stock market and are commonly used as benchmarks for investment portfolios.

Let’s start out with comparing the two:

Passive investing and active investing are two different approaches to investing that investors can choose from.

Passive investing is a strategy that seeks to match the performance of a particular market or index, such as the S&P 500, rather than trying to outperform it. Passive investors typically invest in a portfolio of diversified index funds or exchange-traded funds (ETFs), which offer exposure to a broad range of stocks, bonds, or other asset classes.

On the other hand, active investing involves actively managing a portfolio of investments with the goal of achieving better returns than the market or a particular benchmark. Active investors make investment decisions based on market trends, economic conditions, and other factors that may influence the performance of individual securities or asset classes.

Passive investing is often associated with lower fees and a more hands-off approach, while active investing is associated with higher fees and a more involved approach. However, both approaches have their advantages and disadvantages, and the choice of which approach to take depends on the individual investor’s financial goals, risk tolerance, and investment philosophy.

For the most part, unless you are a hedge fund manager on Wall Street, passive investing is the way to accumulate wealth. Worrying about day-to-day market swings is a dangerous game and a majority of professional money managers still can’t beat the S&P 500 consistently.

Despite recent volatility in the stock market, the US consumer remains resilient against all odds.

In the United States, consumption accounts for a significant portion of GDP. According to the Bureau of Economic Analysis (BEA), personal consumption expenditures (PCE) accounted for approximately 68% of US GDP in 2021. This means that consumer spending on goods and services was the largest contributor to the country’s economic output.

The United States consumer is generally considered resilient due to several factors:

1. Diversified Economy: The US has a diverse economy that is not dependent on any one industry or sector. This means that if one industry or sector experiences a downturn, consumers have other options available to them to maintain their standard of living.
2. High Disposable Income: The average American has a higher disposable income than people in many other countries, which means they have more money to spend on goods and services, even during times of economic hardship.
3. Strong Social Safety Net: The US has a relatively strong social safety net, which helps to protect consumers during times of economic hardship. Programs like unemployment insurance, food assistance, and healthcare subsidies can help individuals and families maintain their quality of life even during tough times.
4. Resilient Consumer Culture: Americans are known for their consumption culture, and many are willing to spend money even during times of uncertainty. This spending can help to prop up the economy and provide stability during difficult times.

Overall, the combination of a diversified economy, high disposable income, a strong social safety net, and a resilient consumer culture has made the US consumer relatively resilient over time.

I had a great buddy of mine ask if the US will go into recession in 2023. My answer: if the consumer remains resilient and unemployment remains low, good luck tipping the US economy into a recession!

The XRT which tracks retail companies has dipped significantly over the past five trading days due to the hotter than expected inflation reports coming in recently.

Take a look at personal consumption, its still ticking higher! Be on the look out this tax season for some refunds from swelled state budgets from unused federal Covid aid dollars to help residents cope with inflation.

There seems to be an interesting dilemma between the Market and the Fed since the beginning of 2022 when the vicious hiking cycle was kicked off by Powell and friends.

The market continues to get its hopes up every time there’s a slim chance of a pivot only for it to be crushed at the next FOMC meeting or by hawkish Fed speak.

The recent drawdown in stocks has been caused by a combination of economic data showing sticky inflation and Fed hawkishness showing a willingness of board members to continue hiking at an accelerated pace.

The S&P 500 started off the year hot with an almost 9% gain only to cut that gain in half come today. Markets are now pricing a terminal Fed Funds Rate around 5.3%, which is above the current rate of 4.50%-4.75%.

Selling will most likely persist until the market gets a clearer picture of where rates are headed.

Markets are on a tear this year! Let’s take a look at some of the hotter stocks in the S&P 500 that are outperforming the index.

Warner Bros. Discovery (WBD) is up 50% year-to-date even with a more than 3% decline today. Investors have rallied behind this stock after it was spun off due to upbeat guidance from the CFO Gunnar Wiedenfels. Let’s check back on this stock next month and see how it holds up.

Tesla (TSLA) is up 40% year-to-date. Tesla has had a rough go at it over the last few month with supply chain issues and rising interest rates that has caused the stock to plummet. Despite that Tesla reported record revenue last week. The company also cut its car prices which has sparked demand. CEO Elon Musk said during an analyst call, “Thus far in January we’ve seen the strongest orders year-to-date than ever in our history. We’re currently seeing orders of almost twice the rate of production.”

Let’s check back with Tesla in a month or so.

Western Digital (WDC) has gained 38% this year. Not too much in the news to back up this rally. I’m sure cooling inflation, less aggressive rate hike, and the China reopening is helping this stock rally. The only material news item found was a merger talk Bloomberg News reported. According to the report the companies were working out a spinoff deal of Western Digital’s flash business that would merge with Kioxia and listed in the U.S.

Let’s see what Western Digital has in store over the next month.

Markets are off to a hot start in 2023 with growth assets taking the lead so far. Inflation has been cooling and the Fed is expected to slow its relentless hiking campaign which has set up growth assets for a nice rally.

So far the tech have NASDAQ is up 12% this year followed by the Russell 2000 small-cap index. The S&P 500 is up more than 6% while the value heavy Dow is only up 2.54%.

The stars are aligning for a stock market rally. Let’s see if markets can sustain a rally into February even with the upcoming Fed Meeting on 2/1 where the Fed is expected to raise the benchmark lending rate to 4.75% from 4.5%.

Stay tuned!

New year, new me – as the saying goes. But this is not the case for markets.

It seems the same narratives of inflation and the Fed’s relentlessness to raise rates are carrying over to the new year.

It seems like nothing has worked over the last year and everything is in a free fall.

The S&P 500 has fallen over 16% over the last year, but there are some areas of the market that have been a bright spot.

The XLE, which is an ETF that tracks energy companies, has rise more than 44% over the last year. The XLP, which is an ETF that tracks Consumer Staple companies, has remained steady and eked out a small gain of 0.22%.

Don’t be surprised if the same assets that have outperformed or remained steady over the last year do the same thing this year.

There’s no doubt the start of this decade has been one of the most challenging environments for markets and businesses to navigate. In the last two years we’ve seen a global pandemic that triggered a myriad of supply chain issues and unprecedented monetary accommodations from central banks around the world that resulted in the highest inflation seen in 40 years. In addition, Russia’s invasion of Ukraine has up-rooted commodity markets and challenges the power and influence of the Western world.

Despite all the madness, markets remain resilient and US consumer spending remains near record highs.

With consumer spending accounting for roughly 70% of US GDP, its unlikely the US will see a severe recession unless consumer spending significantly drops off, instead of leveling off like it has been for the last few months.

The bond market is in a weird place this year. Risk-off behavior in financial markets has been all out of whack this year. Typically, when equity prices fall, yields fall due to investors fleeing to safer assets, such as bonds. The price and yield of a bond have an inverse relationship.

Despite drawdowns in equity prices, rates (yields) have held steady. Recently risk-off behavior has had some normality to it with investors driving down longer-term rates with purchasing long dates fixed income assets – such as the 10 year treasury.

As you can see from the chart above, short term rates are higher than long term rates, indicating an inverted yield curve. An inverted yield curve implies an impending recession – the question is when?

Markets took a breather this week after coming off strong gains the previous week.

The Dow (DJI) was the only major index that eked out a small gain of 0.12% while the S&P 500 (SPX), NASDAQ 100 (NDX), and the IWM – which is an Exchange Traded Fund(ETF) that tracks the Russell 2000 small cap index were down -0.27%, -0.27%, and -0.97%, respectively.

The losses were due to hawkish Fed narratives by James Bullard, President of the St. Louis Federal Reserve. Bullard states, “The policy rate is not yet in a zone that may be considered sufficiently restrictive.”

The market is still trying to figure out where the Fed is going with rates and when this hiking cycle will pause.

The S&P 500 shot up after the 8:30am Producer Prices Index Report coming in less than expected. The report came in at 0.2% vs. 0.4% expected, welcoming risk off behavior due to peak inflation.

The gains after the report held steadily above 1% until a report from the Associated Press (AP) came out revealing Poland was hit by Russian missiles. The S&P 500 gave up gains after the report came out, falling around 0.4% at its low.

Despite the report from the AP, the S&P 500 still ended the day positive with a gain of 0.5%.

Chart of S&P 500 throughout the trading day.

Let’s see what happens tomorrow!

Let’s go back in time. It’s November 2021 and markets are roaring, especially crypto markets, due to rock bottom interest rates thanks to the Federal Reserve.

Cryptocurrencies were the talk of the town with some coins, like Dogecoin, exploding in value. Sports athletes, celebrities, and governments began advocating and even adopting cryptocurrencies as a means of exchange.

The party in crypto markets was fun while it lasted, then the Fed finally showed up. Better late than never, the Fed began a process know as quantitative tightening (QT).

The Fed announced QT policies in November 2021 which began with the tapering (buying less) of Treasury Securities and Mortgaged-Backed Securities (MBS). The Fed enacted Quantitative Easing (QE) in March 2020 where it purchased massive quantities of fixed income securities on the open market to prop up markets with liquidity and keep borrowing rates low.

The Fed continued QE policies through all of 2020 and most of 2021. The mere announcement that the Fed was going to start the process of QT collapsed crypto markets as fast at they roared up, making fools of the self-proclaimed geniuses that rode it to the top.

The above chart is two popular cryptocurrency ETFs.

1. ProShares Bitcoin Strategy ETF (BITO – red line): down 75% over the past year.
2. Bitwise 10 Crypto Index (BITW – orange line): down 85% over the past year.

Will cryptocurrency make a comeback?