From dial tone to Dot Plots—why a little certainty can go a long way in markets.
KEY TAKEAWAYS
MY HOT TAKES
Thanks, Dad. Say what you want about the Fed, but one cannot argue that it is consistent. Sure, it throws a few surprises here and again, but for the most part you can count on it to be there. Kind of like a dial tone when you pick up the phone. I couldn’t help myself–I just had to get that reference in. I realize that a good portion of my beloved readers have no clue what a dial tone is, or why it is so important. I will briefly explain.
Back in the last century🤣 when we all used landline telephones as our only form of communication besides… um, face to face interaction, the telephone was such an important tool in everyones’ life, that any uncertainty around its performance was simply intolerable. Give me a “woot woot” if you remember those days. Did you know that the phone could even work if the power was out? It’s true, Ma Bell provided its own power. I learned that the hard way as a kid, but that is a story for another day. ⚡Anyway, we had a saying back then that something could be as certain as the dial tone, which meant… er, it was certain.
Today, we are much more willing to accept uncertainty, except for when it comes to the markets and our portfolios. Unfortunately, however, when it comes to markets, we can count on only “death and taxes,” AND that the certainty that the markets rarely do what is convenient for us. That’s right, we can be certain of uncertainty. So, let’s just say, we would like to minimize uncertainty. That is not to say that stocks can’t rally in an uncertain environment, but some level of certainty is a necessary ingredient for a sustainable and clean rally. Why did I just waste three whole paragraphs to riff on the word “uncertainty”? Well, you should have a clue by now, if you have been reading my recent posts, or anything in the news lately.
Stocks closed out 2024 with a bang and a landmark year for returns, partially driven by exuberance over the incoming Trump administration… and maybe a bit of AI. The President is a well-known fanboy of the stock market, and he would surely do everything in his power to ensure that equities AND cryptos would perform well. Or so we all thought.
Once inaugurated, the President didn’t waste much time getting down to business of the State, enacting piles of executive orders. Soon… really soon… like a day or two later, the President started his tariff talk, AS PROMISED, mind you. However, the market wasn’t prepared for the magnitude of the President’s first salvo, nor was it prepared for the ambiguities around them. Uncertainty was unleashed on the markets, sending bond yields higher and stocks on a rocky, sideways journey. And it has not let up.
Since inauguration, we have had two FOMC meetings including yesterday’s. We will give the Fed a pass for the first meeting, as it was right after inauguration. So, yesterday was the Venerable Committee's first chance to opine on the state of the economy with nearly 58 days of data (including yesterday) since inauguration.
This is what they said. The economy was going to perform worse than it thought in December, inflation will be higher than it expected earlier, and that it expects 2 rate cuts (or 50 basis points) before the end of the year. We learned all of that in the Fed’s Summary of Economic Projections released yesterday. I covered this and mostly predicted this in yesterday’s blog post “Will Powell Soothe the Market’s Nerves or Stoke New Fears?” (check it out here).
I do have to admit that I wasn’t expecting quite as much of a negative revision to GDP growth. That said, I was also not expecting Powell to specifically link inflation to tariffs, though he did. Now, I have written a lot about tariff-borne inflation and specifically pointed to recent moves in “goods inflation” which I have asserted was directly tied to tariffs. Well, apparently the FOMC agrees with me and Powell said as much in his press conference, numerous times.
Let’s get to the press conference, but first I want to reference the Fed’s official policy statement which referenced uncertainty with the term “uncertainty around the economic outlook has increased.” Now, if this statement were released from a meeting without projections, markets would likely have reacted negatively. But we got the Dot Plot simultaneously, and we learned in an instant that the Fed was still expecting two cuts this year, despite inflation fears around tariffs. Markets held tight.
Powell took to the podium at the bottom of the hour and delivered his statement. He referenced “uncertainty” twice in his prepared remarks. I had Chat GPT watch the video of the entire press conference, and it noted 14 uncertainty references. That is an awful lot of uncertainty. But alas, the market rallied in response. Well, the Chair also spent a lot of time explaining that the economy is very solid… despite uncertainty, and what he seemed sure was inflation caused by tariffs. Low growth and higher inflation are the main ingredients for stagflation.
How was it that markets rallied, even without an immediate rate cut? Well, certainty. Powell behaved as one would expect the leader of the Fed to behave. He exuded confidence that the Fed was on top of things, and the Dot Plot reminded us that we may still get out 50 basis points of cuts this year.
Today, markets will execute a more scrutinous judgement on the Fed’s decision and Powell’s comments. Before yesterday’s announcement, markets were predicting 2 rate cuts with a 40% chance of a third. This morning, markets are giving that third cut a 78% chance, which is good by Wall Street Standards. Was Powell ultimately successful in quelling some of the fears that have been seeping into the market. Thank you, Jerome, for being consistently ambiguous.
Number of times I used the word “uncertainty” in this blog post: 9
YESTERDAY’S MARKETS
Stocks maintained a “positive” attitude in yesterday’s session and got their just desserts from Chairman Powell who gave a solid “it could have been worse” performance. Powell’s presser gave traders the confidence they needed to close stocks well in the green. The Fed maintained its 2-cut policy amidst increasing policy uncertainty.
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