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Bears A Little Spirited After Fed

Market Musings

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group


Unfortunately, the Fed continues to play word games and to pull the rug out from under investors.  The institutional investor doesn't feel much of the pain, but small investors often end up getting the shaft.  This leads us to one of our last Market Musings of 2024.  This week's film de jure is the 2022 Apple movie "Spirited."  I normally don't use recent films or songs as a muse, but this one applies.

  • In the new era of streaming, it's a little more difficult to determine how well a movie performs after release.  In fact, Apple, in its infinite wisdom, does not release streaming results for original content.  However, according to some sources, it was the most streamed Apple movie to-date at the time of its release.
  • The movie is a play on the famous Charles Dickens' novel "A Christmas Carol."  In this version, one of the ghosts is Scrooge.Will Ferrell & Ryan Reynolds were each paid $20 million for their roles in the film.  While they clearly carry the film, the total payroll for the movie was $75 million, making their take home more than half the total payroll.
  • During one of the memorable musical scenes in the film, the song "Good Afternoon," a man carrying a package for Dame Judi Dench is actually her grandson, Sam Williams.
  • The collaboration on the film between Benj Pasek & Justin Paul can also be viewed in other collaborations such as, "La La Land" and "The Greatest Showman."
  • Ryan Reynolds has a full grown beard in the "Spirited" movie poster, despite not having a beard at all in the film.

Here's what we've seen so far this week...

Good Afternoon On Wednesday?  The esteemed Fed Chairman Powell decided once again to pull the rug out from under investors with the Fed's 2025 Outlook.  While no one is perfect, it was just 3 months ago that the Fed's "Dot-plot" showed between 3 and 4 rate cuts in 2025.  Markets, especially over-valued equities, have been trading higher as investors expected easy money to last through next year.  Oh, how much has changed in just a few short months.  Equities tanked Wednesday on the new revelations from the Central Bank.  First, the revised "Dot-plot" for 2025 now shows only 2 cuts in 2025, which means investors' expectations of 100 bps reduction in rates next year just got cut in half!  By the way, the Fed Futures show a 91% probability of no rate cut in January, versus only a 53% probability just one month ago.  Second, the Fed revised their expectations for inflation from 2.1% for next year (September's forecast) to 2.5% for next year.  That's an increase of 400 basis points, which could prove substantial.  As we posted last week, we've already seen producer prices exceed consumer prices on a year-over-year basis, which typically indicates inflation is headed higher.  So, the real question becomes, why would the Fed be lowering rates, which encourages economic activity, when they expect inflation to continue to increase?  The real reason the Fed began cutting in September and will likely cut into next year is that interest on Federal debt has exploded.  Currently, U.S. interest expense is more than 15% of U.S. tax revenue.  According to the CBO (Congressional Budget Office), that percentage is likely to only increase over the next few years.  This is the consequence of what was done during COVID.  So, the Fed has filled investors' heads with easy money, only to yank those hopes away at a time when equities are trading well beyond normal valuation metrics.  The scene in "Spirited" where Ryan Reynold's character Clint discovers his ghostly friend "Present" is actually Ebeneezer Scrooge, they share a song titled "Good Afternoon."  The premise is that in Dickens' original work Scrooge yells at his nephew "Good Afternoon!" (a rude reply) repeatedly to get him to leave.  So, I think I speak for most of us when I offer to Mr. Powell, "Good Afternoon!"

Please Sir May I Have Some More?  Like the cameo of Oliver in "Spirited" (a homage to another Dickens novel) investors are now looking to the Fed and markets with their hands out asking, "Please, sir may I have some more?"  However, there is dwindling easy money and fewer dollars to chase risky investments.  Of late, cryptocurrency has been all the rage.  Over the past 30 days, Bitcoin, one of the largest, most liquid cryptocurrencies has risen 17%.  However, over the past few days, the currency is down more than 8%.  The question now becomes, what investors are going to buy the dip?  Markets appeared ready to undo most of the selloff from Wednesday afternoon.  However, equities are struggling to hold onto gains as of Thursday afternoon.  This may be because there is a lack of liquid assets (dry powder) to snatch up equities at slightly cheaper prices.  Investors currently have record high allocations to U.S. equities, while at the same time, allocations to cash are the lowest on record.  So, again I ask, who's going to buy the dip?  Meanwhile, it's become evident that volatility might be back to stay.   After spiking on Wednesday above 27 and holding above 23 most of the day today, the VIX is now above its historical average of 19.5.  The key will be how does the VIX move over the next 15-30 days.  When the VIX spikes above 27 and stays elevated over a 15-30 day period, it tends to stay elevated, especially when equities are making or have recently made all-time highs.  A bad combination for equities moving forward is when the VIX spikes while stock market breadth is struggling.  Currently, only 54% of S&P 500 stocks are trading above their respective 200-day moving averages.  Another measure of breadth is the number of advancing versus declining stocks on the New York Stock Exchange.  That measure also shows significantly more stocks declining than advancing.  In fact, the 30-day moving average of advancing versus declining stocks is now the lowest it has been this year.  It's difficult to tell if the market is reaching a top, but with volatility rising, its best to keep clients on track with their stated risk tolerance and make sure they are properly diversified.

Here's the "Good Afternoon" scene that has quickly become a holiday classic in my household...
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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

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