Hot Mic - The Fed Pivot confirms the rally - Here's what happens next

David recaps the Fed decision day. "I'm sitting in front of my Bloomberg screen digesting all we learned today on the heels of one of the more important Fed meetings of the year. Let me know what you think. If you think I got it wrong shout it out. Best, David Nelson, CFA aka The Money Runner. 

Transcript

00;00;00;01 - 00;00;34;21
 Speaker 1
 Let's just talk out loud and get some ideas here. Obviously, it was a Fed day and markets just took off on the news. There was no other way to put it. It became very clear, partially in the statement, but certainly in the press conference they followed Jay Powell pretty much said, we're done. He didn't say it exactly like that, but he he said that they you know, the conversation has shifted from are we going to hike?
 
 00;00;34;22 - 00;00;54;15
 Speaker 1
 And the base case is that they are not. He actually said that the base case is that they're not going to hike. And now they're thinking about when are we going to cut? They don't know if they're going to cut. But markets are certainly pricing that in. As a matter of fact, it's become, you know, kind of a Wall Street game over the last several months.
 
 00;00;54;16 - 00;01;16;12
 Speaker 1
 We've seen the dot plots. We've seen we've seen the interest rate probability chart slowly move, you know, move, move closer. And it wasn't that long ago we were looking at maybe the first cuts at the end of next year. Now, then they moved up to maybe November, then June. That may look like a, you know, pretty good shot.
 
 00;01;16;12 - 00;01;41;09
 Speaker 1
 Now, even a decent, very decent possibility you're going to get it in March. There are now some even betting as early as January. So the conversation has really shifted in here. So all that's really happening from my perspective is that the the Fed meeting, the data that followed the press conference that follow, you know, confirmed what markets had already figured out back in November.
 
 00;01;41;15 - 00;02;02;15
 Speaker 1
 In a lot of ways, that's what the kind of all started with that, you know, that that jobs report, the benign inflation data, it kind of all started there. And in one way or the other, the markets figured it out and just took off. And it's been a, you know, a monster rally. Now, it begs the question, what happens from here?
 
 00;02;02;16 - 00;02;27;08
 Speaker 1
 Well, I'm sitting here just having a, you know, this conversation. It is seven, but call it like 715 at night. Futures are already up, not a lot, about 26, but everything's been an uptick. I suspect Europe will be up tomorrow on the heels of that first, remember that Europe was closed and a couple of things. Some of the things that could drive the rally or I think there's two things to consider here.
 
 00;02;27;08 - 00;02;50;08
 Speaker 1
 What could drive the rally and what could what what could end the rally? What could drive the rally is you got to remember how many people are are are rolling T-bills at this point. And now if I'm going to my fixed, you know, income charts, let's just take a look here. If I start to look at T-bills now.
 
 00;02;50;09 - 00;03;27;15
 Speaker 1
 Holy crap. Wow. Two year yields came in 32 basis points. 32 basis. This is these are monster moves that we're seeing in in treasuries today. 32 basis points in two year yields. Wow. Ten year yields came in 18.8 basis points. If they were down across the board, no question. Even the 30 year was down 13 bips. So you get the ten year now 4.01.
 
 00;03;27;15 - 00;03;50;26
 Speaker 1
 We're just a breath away from, you know, closing below for your 441 for two year. And that kind of sets up, you know, a pretty interesting scenario. So think about what that means. So now you've got people in T-bills and I even run a program, you know, where we're rolling, you know, three month paper. And as a matter of fact, papers coming due at the end of December.
 
 00;03;51;13 - 00;04;23;15
 Speaker 1
 Now that that that was supposed to roll out, that was supposed to roll out one year, the three month paper. Well, now the three month paper, I'm looking at it right here, which is at 539 now to go out to one year. Now that's down. We've now broken five. Okay. That, that that's down to 4.91. And now you got to you yields all the way down to 4.41.
 
 00;04;23;15 - 00;04;52;15
 Speaker 1
 Three year is all the way down to 4.13 and you get five years below four. All right. Let's got to tell you something. So obviously the dynamic is shift. The conversation is going to shift. What does this all of all mean for us right now? So, look, a lot of this news is priced in, but what I think you're going to see are and I'm just going to check here and look at some of the some of the charts in terms of ETFs.
 
 00;04;52;15 - 00;05;24;29
 Speaker 1
 What was working, what was not working here you had, holy crap, look at value of about 3.3%. MidCap was up two and a half percent. Mega-Cap was up, you know, only one a little less than the S&P 500. Some of the quantitative funds that focus on midcap, they had good days up about 2%. But I think you're going to see, see, see investors move down this, you know, from the safety curve to the to the risk on curve.
 
 00;05;25;05 - 00;05;46;08
 Speaker 1
 In other words, you you're going to have to pay less for growth. That doesn't mean everybody's going to run out and sell their Apple, Microsoft, Amazon alphabet. They're going to sell some, but they're going to they're going to start to put on some they're going to start to put on some risk and they're going to start to buy some asset classes that have been out of favor for a while now.
 
 00;05;46;08 - 00;06;03;11
 Speaker 1
 Small caps have, you know, started a resurgence. And this is what you see, you know, kind of at this point in the cycle, you start to see some big cut, some raise. You're going to see some shifts in in asset classes. And then the danger that many will say, well, what if they stayed too long? What if they don't follow what the market is telling?
 
 00;06;03;11 - 00;06;26;14
 Speaker 1
 The market is saying that they're going to be cutting in March, certainly by May. May is almost a lock. June is definitely a lock. If if they don't start doing that, the concern is, is that real rates will will get even larger because inflation keeps coming down and the Fed funds rate doesn't come down. Right. That means real rates start to expand and you get even more restrictive.
 
 00;06;27;08 - 00;06;44;11
 Speaker 1
 And that's the concern of the market because you've already got a lot of credit card debt out there. You've got, you know, people are paying a fair amount of money on credit card. It's certainly a drag on on on their pocketbook and so that they could blow it. They're trying to engineer this soft landing, but they could certainly blow it.
 
 00;06;44;28 - 00;07;07;00
 Speaker 1
 But I would say for a little while and certainly until, you know, the end of this year, I'm not sure what could stop this train other than the fact that, you know, every corner of the planet still is kind of a surprise. There are still things out there. So nothing is ever a lock in the sense that, you know, the there's nothing to worry about.
 
 00;07;07;17 - 00;07;30;12
 Speaker 1
 But, you know, you got to make you got to make decisions. Do you hide in the bunker or do you do something about it? And I think most people will choose to come out of the bunker and look at the sunlight, and there's a fair amount of sunlight in here. The other thing that is weighing going to weigh on things is the fact that you've got valuations are, you know, certainly somewhat rich here and in certain areas.
 
 00;07;30;12 - 00;07;47;29
 Speaker 1
 But when you go down, you know, when you go down the the market cap curve, you start to get into mid-caps and small caps. The valuations start to get a lot more respectable. As a matter of fact, even if you look at the S&P 500, if you look at the equal weighted S&P, the the PE multiple, they don't have it in front of me right now.
 
 00;07;48;05 - 00;08;07;16
 Speaker 1
 It's a lot more respectable than what you would get, you know, in just the S&P 500, which is, of course, dominated by the Magnificent Seven, which is is is no secret. So it's a pretty big there. There's no other way to look at it. It was kind of a regime change and it was certainly you'll the headlines will read.
 
 00;08;07;16 - 00;08;30;24
 Speaker 1
 You know the Fed pivots and today was definitely certainly a pivot, certainly in rhetoric. I'll have more in the morning or I'll have more during the week. I'll be publishing later in the week and of also have our money runabout brought excuse me a money runner podcast probably coming up maybe this weekend Monday and a very very important upcoming upcoming interview.
 
 00;08;32;28 - 00;08;54;04
 Speaker 1
 I'm so excited about it. I'm not allowed to mention who it is, but trust me, you'll know his name. And you've seen this gentleman quite a few times. He's he's a rock star. Thanks for joining up, David Nelson. This is the market.