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— Trying to figure out, based on previous Fed statements, why the current OMC meeting statement is so shocking and bad news.

— New negatives, based on media commentary, seem to be the same negatives that have been with us ever since Fed began to lower rates

— A new hitch in the ridiculous government shutdown drama — the president elect’s unofficial right-hand man throws and monkey wrench into the works.

–– Nothing new here folks … buy the lesser lights of the market.
 

Why the shock and surprise?

What has changed in the statement? Only two things: the actual Fed Funds rate (which went down 1/4%), and one member of the committee became more hawkish.  Amazingly this took 2.58% off the Dow Jones industrials, 3.58% off Nasdaq, and 4.3% the Russell 2000. 

The Fed has been both consistent and true to its word. When Treasury Secretary Yellen told you that Federal Reserve action on interest rates would be “data-driven”, she and her predecessors meant it. Subsequently Jerome Powell has operated in the same way. So when he tells you “higher for longer” you should take him at his word. When he tells you that he likes the way the economy is looking, but is keeping and eye on employment (don’t want that to crash), he means it. If the economy and employment starts heading south he will ease, or ease faster but that is not the case now. The economy is strong now. No need to rush to cut in light of our recent inflation experience.

With their usual eye on the short-term the market mavens and media want the relaxation sooner rather than later. Ergo, they may be disappointed. However in no way has the Fed led the the market to expect rapid rate cuts. The way the markets acted today you would have thought the Fed broke a promise to cut … ridiculous. 

According to Bankrate, the average Federal Funds rate between 1981 and March of 2022 was 6.38 % (of course this may skew a bit lower if you include the past two years but will probably not pierce 6%). During the period 1981 to 2022 US GDP grew from $3.2 billion in 1981 to $25.5 trillion (Statista.com). The point here is that we have just lived through 15 years of  historically low interest rates caused by two significant economic crisis. Normal rates should skew much higher. Ain’t perspective great? Don’t count on any perspective from your traditional media sources.

New Negatives = Old Negatives

Of course, what hasn’t killed us for the past couple of years (apparently ultra-high, economy-killing rates) will finally do us in this time … the old narrative swings back. More bad news for housing, the 10-year US Treasury note yield popped up .135% to 4.52%. This is a benchmark for setting mortgage rates and it seemed to really unnerve the market. However this note is also a flight-to-safety haven. My guess is buyers will show up in the morning pushing the yield back down. There also may be buyers around who think the yield at 4.5% looks attractive on a longer-term basis. 

Trump favorite, Musk, throws a bomb into the government shutdown drama.

Elon Musk, genius (sometimes evil genius), off-the-deep-end billionaire and now one of Donald Trump’s closest confidents has weighed in on the the compromise spending bill to keep the government open. He was not having any of it, stating that “Any member of the House or Senate who votes for this outrageous spending bill should be voted out in two years.” Not sure whether his comments came before Donald Trump’s condemnation of the bill or after, but right now what was assumed to be a settled issue is up in the air. The deadline is this coming Saturday.

Nothing new in this reaction. Buy the unloved.

There is absolutely nothing new in either of these issues but for some reason in a soundbite, short-attention-span world, the market acts like it is seeing something new. In the case of the feared shutdown, for a guy who rates the market’s performance as somewhat of a report card, this craziness will probably stop before it starts or at least shortly thereafter it starts. My point is we’ve been here before.

My advice continues to be to avoid those stocks that the market has had an ongoing infatuation with and buy the unloved. In a broader context, avoid technology and buy stocks considered value, mid-cap and small-cap. These are areas that market has avoided the past few years. Remember, Nvidia use to be in a couple of these silos.

What do you think?

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