Things you need to know.
- JJ gave them what they wanted (or did he?)
- Stocks get WHACKED – S&P loses $1.8 trillion of value.
- 10 yr bond yields surge – now above 4.5%
- VIX up 75% – HELLO?
- Try Nana’s Cheesecake (Christmas Style)
“FIRE in the Hole! FIRE in the Hole” Someone call the FDNY!!!
“Fire in the Hole’ is an expression originally used in mining and military contexts to warn that an explosion is imminent. It signals that a fuse has been lit or a charge is about to detonate, giving everyone nearby time to take cover.
In a broader sense, it’s now used informally to mean that something intense, potentially disruptive, or risky is about to happen. About to happen???
Stocks got WHACKED! The FED cut rates by 25 bps – which is exactly what the street was demanding and the S&P lost $1.8 Trillion of value! The Dow lost 1123 pts or 2.6%, the S&P lost 180 pts or 3%, the Nasdaq tumbled 716 pts or 3.6%, the Russell got punched and kicked falling 103 pts or 4.4% the Transports gave up 455 pts or 2.8% while the Equal Weighted S&P gave back 216 pts or 3%.
Consumer Discretionary – which was up 32% ytd…. lost 4.5%. Tech and Real Estate losing more than 3% on the day….and everything else losing more than 2%. The contra trades though had a winning day. The DOG + 2.6%, SH +3%, PSQ +3.6% VIXY + 16% and the triple levered S&P short – SPXS + 9%
So, I guess my question is – Why is anyone surprised at what happened yesterday? JJ gave you what you wanted – a 25 bps cut, but then he leaned what some considered ‘sharply right’ (right here – means Hawkish) – and only promised you 2 more cuts in 2025 – which I also think was a mistake, but hey ‘what do I know’? The expectation 12 months out had been for 4 – which is in itself an issue because how can anyone ‘expect’ anything 12 months out when so much can change (and most likely will?)
Did you forget how we started 2024 and there were calls for as many as 8 cuts? It was ridiculous and in fact it’s ridiculous that we even got 3! Recall – even the WSJ (along with a range of other street analysts/strategists) have been questioning Why? Why was the FED so intent on making another cut in 2024 when the data is telling us that inflation is an ‘issue’. Their own expectation for 2025 is to see the PCE expectation (The FED’s favored gauge) to rise from 2.1% to 2.5% (which means CPI will be even higher) – this after the very aggressive September cut and the follow-on November cut. Were they afraid that if they didn’t all hell they would break lose? How’s that work out?
Now –the fire started when JJ said.
“Today was a closer call but we decided it was the right call.”
“We need to see progress on inflation, it is kind of a new thing!” (was that a joke?)
“We’re modeling the impact of tariffs on inflation.”
(Which is funny because JoJo kept the prior Trump tariffs on China and in fact ‘expanded’ upon them and that never seemed to be an issue for JJ before.)
And this led to a ‘panicked sell’ since the August 5th Yen carry trade collapsed. All of those momo guys (momentum algo’s) that have been driving the market higher suddenly shifted gears going from 4th gear to REVERSE in one swift move! (Again, I have been warning about this for weeks now!). Makes no difference what the fundamentals are – the momo guys always win in the short term by creating that ‘fear of missing out’ but eventually the fundamentals kick in. And yesterday the fundamentals started to show their face. JJ all but admitted it – inflation in this country remains an issue – so get used to it.
Look, in addition – global equites are in a unique place….Japan is raising rates from decades of zero, China’s economy is deflating, Europe and the US are ‘inflating’ – The BoE stopped cutting all while the ECB (European Central Bank) and the US continue to cut rates – which leaves all of us to ask – Whaaaaaaat are you doing? (Note the emphasis on what!)
The labor market is not weakening -as you told us it was when you made that aggressive rate cut 5 weeks before a Presidential election – which in retrospect was a clear No, NO. It was a No No at the time, but they told us that they knew what they were doing. The consumer continues to spend money like there is no tomorrow, while eco data has been leaning ‘cautious’. Manufacturing PMIs remain in contractionary territory while SERVICES PMI’s remains in expansionary territory – remembering that the US is a 75% services economy. Capacity Utilization remains near record levels, Industrial Production hovers on either side of neutral, Building Permits yesterday surged +6.1%. PPI, CPI and PCE all have been trending higher recently and are expected to be higher next year.
Bond yields have done nothing but go UP even as they CUT the fed funds rate. What were 3.5% 10 yr yields in September when you made that 50-bps cut are now 4.52% – a 30% increase. What were 6.5% mortgage rates are now 7+%. Yesterday 10 yr yields surged by 13 bps…taking us up and thru 4.5% – which is also a red flag and is a level that becomes somewhat of an issue for investors if you think inflation continues to be an issue. Now others will say that bond yields are up because the economy is strong (which could be true) but then if the economy is strong – Why are we cutting rates? A strong economy can handle 4.5%-4.75% rates. Yesterday, the 2-year surged by 14 bps to end the day at 4.35% while the shorter durations of 3 and 6 month bills are yielding 4.35% and 4.31%.
The VIX (remember that index)? Oh boy, it surged by 75%! Blasting through all 3 trendlines and blasting through the highs of Sept, Oct and November. Remember, I said the VIX is in the ‘no worry’ zone, which is exactly why we need to be worried…All we need is one headline to send the VIX surging and when that happens, the algo’s will go into ‘sell mode’ – and stocks will decline…which is again why I keep telling you to sit tight – because you know it is coming. Oh boy, what a headline we got! This morning the VIX is in a small retreat – 24% – which makes sense after the outsized move yesterday….and guess what stocks are doing?
US futures are UP…. (again, think of the outsized move yesterday) – a bounce is not a surprise…but don’t get too excited just yet…. There is a lot to digest here. The Dow + 148 pts, the S&P +15, The Nasdaq +70 while the Russell is +10. The velocity of the drop while unnerving some – did make sense considering what JJ said yesterday and where the momo guys had taken it.
Now what would have happened over days prior to the technology that exists today, happened in 6 hours…. but either way it had to happen – so the speed of the decline should not be the concern…Where we go from here is the focus. Which is why I say – call you advisor (or call me!) Discuss your plan, your concerns, your needs and confirm that you are on the right path. Remember – nothing goes straight up forever –but that does not mean that you can’t grow your portfolio consistently over time. You can, you just need the plan.
Eco data today includes the second revision to the 3rd qtr. GDP, and it is expected to be +2.8% (no change), Personal Consumption at +3.6% up from +3.5%, Philly Business outlook +2.8 vs. -5.5, Initial Jobless Claims of 230k down from 242k and Existing Home Sales. Tomorrow will bring us the FED’s favored inflation gauge – the PCE and that is expected to be UP…. +0.3% (vs. +0.1%) m/m and + 2.5% (vs. +2.3%) y/y…which only begs the question – Whaaaaaaaaat are they doing?
European markets are under pressure. All market centers down more than 1.25% with Spain in the lead at -1.7%. and Italy only down 1.3%. The pressure is just a reaction to the FED’s move…remember – those markets were closed yesterday when the announcement was made. The BoE is expected to announce their latest policy move any moment and there is no cut expected. Sweden cut rates by 25 bps and Norway did nothing.
The S&P ended the day down 178 pts to end the day at 5872 piercing trendline support at 5922 – finally attempting to fill the gap created on November 6th when the S&P gapped up 90 pts…leaving a hole between 5782 and 5862…. I would not be surprised to see us test a bit lower – maybe like the mid 5800’s before making a year-end rally attempt to take us back to 6000. Remember – we are now officially in the holiday travel season…. asset managers, investors etc. are away from their desks and that will allow for more amplified / exaggerated moves. Which is why you should not overreact.
Again, at this point, I would let the portfolio ride only by making last-minute changes due to tax planning issues. New money should be sitting in a gov’t mm fund earning 4.25% while we wait for the new year – where I fully expect (or hope for) some early weakness to take the froth out. In the end – patience is a virtue.
Take good care,
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions, which may not necessarily align with our firm’s standpoint.
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A holiday staple…Nana’s Cheesecake
This is my favorite cheesecake recipe… and we make this for all of the holidays – it’s always a crowd pleaser and so easy to make. This recipe once again reminds me of my grandmother – It will bring a smile to your face and will quickly become a staple on your desert table along with the Italian pastries – cannoli’s, Profiteroles, sfogliatella, parigini, pasticiotto. This Christmas version has a twist – read on.
Preheat oven to 375 degrees.
Crust – 1 1/4 cup flour, 1 1/4 tsp of baking powder, 1/4 c sugar, 1 stick of melted butter, 1 beaten egg, 1 tsp vanilla.
Put all ingredients into a deep-dish pie plate and mix directly with a fork. Once formed – using the back of a tablespoon – gently spread it out into the plate and up the edges.
Filling:16 oz of cream cheese, 2 beaten eggs, 1 c sugar, 1 tablespoon flour, 1 1/4 c eggnog (use whole milk if you don’t what the Christmas version), 1 tsp vanilla.
Combine all ingredients into a blender and mix well. Now pour the mixture directly into the crust – sprinkle with cinnamon and place in the middle rack in oven. Bake for 35 mins…Remove – it will appear shaky… no need to worry… as it cools it becomes solid and creamy. Refrigerate and when ready serve – you can serve it just plain or with any fruit topping you like.
Buon Appetito
