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☕ Now what and where do markets go from here?

Dec 19, 2024

Good morning! 👋

Okay people, let’s get to it.

We have seen this playbook so many times that we’ve memorized the lines.

Fexperts expect one thing, JPow starts yapping, the markets don’t like it and sell off hard. The bears come outta hibernation to say, “I told you so” while wagging their fingers.

Then, it’s back to business.

The super smart Richard Dean asked me about that earlier today in Dubai and I thought you might enjoy our conversation. And, if you’re interested, we also talked about quantum computing, AI and several stocks including AMD, Nvidia, IonQ and Tesla. (Watch)

Meanwhile and back to the Fed’s follies.

1 – What happened… I thought a rate cut was good?!?!

As expected, Fed Chair Jerome Powell cut rates by one quarter point – 25 bips or basis points - in Wall Street speak.

This brings the overnight borrowing rate to its target of 4.25% - 4.50% and where it was in December 2022 as rates moved higher.

Then as I thought might be the case because he couldn’t leave well enough alone, Powell suggested that the Fed would only lower rates twice more in 2025.

The “roiling” I suggested to Stuart Varney as a possibility at the beginning of the week proved to be on point.

2 – Why did the markets tank?

That’s the interesting part.

The media is telling you that Wall Street was disappointed with Powell’s outlook.

That’s only partly true.

Powell telegraphed the wrong move, then he had to own up to it.

Let me explain.

Chairman Powell has been going on for months about how inflation is easing and telegraphed that the Fed will be cutting rates.

His actions would have been appropriate if he were only thinking about cars, housing, EVs, solar and other industries that have gotten cratered this year.

What Powell didn’t count on, though, is a rise in mortgage rates and short-term yields (which reflect risk). Nor did he apparently consider continued inflation in critical areas of the US economy that are still pinching consumers including, for example, health care, insurance, food, rent, medicine and more.

He said the decision was “close” but I don’t buy that for a New York minute.

The Fed’s models are badly broken, rearward looking and reflect a manufacturing-oriented economy that no longer exists rather than the digital world of our future.

It’s the uncertainty that began the selloff and an immediate uptick in the US10YR rate that caused highly leveraged traders to hit the eject handle in a race to get under VaR limits by the time they had to mark to market last night.

Computers merely finished the job.

The Fed doesn’t have a proactive bone in its collective body so there’s a snowball’s chance in you know where that Team Powell can make the anticipatory decisions our financial markets depend on.

The so-called “dot plot” that is inevitably cited every time this stuff comes up strikes me as more of a Rorschach test at this point. But I digress.

3 – Where do markets go from here?

There are two things to think about.

First, the markets are becoming increasingly volatile because of a dramatic increase in computerization, passive investing and 0DTE options… so unfortunately, yesterday’s massive drop is part of the “new normal.”

That sounds scary but only if you have no idea how markets work.

Big, quick, violent upside runs are just as likely.

Volatility cuts both ways – up and down - especially when computers determine that the markets are over or undervalued and buy/sell programs come into play.

What you want to understand or at least come to terms with is that days like yesterday are now part of your journey as an investor, not something to fear.

In fact, they’re an opportunity you can use to your advantage.

Don’t get me wrong… big down days stink and are definitely no fun, but that doesn't change the fact that they're an opportunity.

Second, the markets have a very defined upward bias over time.

Believe it or not and while we’re on the subject, the odds of the S&P 500 closing higher today are 53.1%, 83.2% three years from now, and an astonishing 93.4% a decade from now.

Staying in the game if you can is clearly the way to go.

4 – Mindset matters

I’ve spent nearly 45 years in global markets and if there’s one thing I’ve learnt in all that time it’s that keeping your head screwed on straight will not only up your game, but can help you become a dramatically more effective and, dare I say it, profitable investor over time.

Here’s a chart that I have taped to my office wall that may help.