Slow and Steady
Begging for easy money... Jerome Powell shuts the door – for now... The Federal Reserve's confidence game... The 'pivot' is coming, but not quite yet... A labor market update... More about biotech...
They're begging for cuts...
On Sunday, U.S. Senator Elizabeth Warren urged Federal Reserve Chair Jerome Powell to cut "astronomical" interest rates ahead of the Fed's two-day policy meeting in Washington, D.C. this week to make housing more affordable for Americans.
I (Corey McLaughlin) am sure corporate financial officers that are staring down costly refinancing in the next few months would make the same argument for their own reasons... So might U.S. Treasury Secretary Janet Yellen, looking at the skyrocketing cost of government debt...
And today, at a press conference after the meeting, most of the questions from reporters sounded like they were practically begging for rate cuts on behalf of Wall Street. After all, we're no longer seeing 40-year high inflation.
But Powell said not yet...
As widely expected, the Fed held its benchmark lending rate steady between a range of 5.25% and 5.5%, where it has been since July... and the central bank said it would keep trimming its balance sheet.
But as is usually the case with these Fed meetings, the market-moving stuff is whatever is said afterward by the Fed chair about the future. To that point, Powell couldn't have been clearer...
We need more "confidence" about the pace of inflation, he said probably a dozen times... and more data that shows the rate is moving toward 2% "sustainably." He referred specifically to the Fed's preferred personal consumption expenditures ("PCE") gauge of inflation and a "12-month target."
Powell also said the Fed probably won't cut rates at its next meeting in March. That particular comment appeared to coincide with the beginning of a late-day selloff that ended with the benchmark S&P 500 Index down about 1.5%, the tech-heavy Nasdaq Composite Index off 2.2%, and the small-cap Russell 2000 Index nearly 2.5% lower.
But the Fed is getting close to a 'pivot'...
Powell said almost all the Fed members do expect to cut rates in 2024, but that the central bank isn't rushing. The Fed plans to start talking about how to change its balance sheet policy in March.
Among other things, Powell said...
It's not that we don't have any confidence. We have growing confidence, but... it is a highly consequential decision to start the process of dialing back on restrictions. We want to get that right. We feel like the strong economy, strong labor market, inflation coming down, gives us the ability to do that.
Slow and steady was the message... with the Fed expecting to cut rates later this year.
About that jobs market...
Today, payroll company ADP reported that the pace of U.S. private sector payroll growth in January slowed compared with December – and the number was lower than mainstream economists' expectations for this month.
According to ADP, the private sector added 107,000 jobs in January. That's down from the 158,000 new jobs added in December and closer to the 103,000 added in November. It's in line with the general hiring slowdown trend we saw in the second half of 2023.
There's a lot of volatility in these reports, and they're often revised later. But they can help gauge the strength or weakness of the labor market and broader economic trends that may be afoot. So far, it's slowing, but not "breaking."
The next major jobs report is January's "nonfarm payrolls," which will be released this Friday. It includes an updated national unemployment rate, and it is typically the biggest market-mover of jobs reports each month. The last few reports have been bullish for stocks.
You see, the reported unemployment rate climbed slightly through much of 2023 but fell from 3.8% in the fall to 3.7% in November and December. Meanwhile, we've since learned that the fourth-quarter 2023 GDP estimate came in at 3.3% annualized growth... defying many analysts' expectations for a recession in 2023.
Revisiting biotech stocks...
Last week, I mentioned that Stansberry Innovations Report editors John Engel and Eric Wade made a bullish case for biotech stocks in their latest issue, in part because the market expects more Fed rate cuts, which could trigger more speculative investments in the sector. As we wrote in the January 24 Digest...
If you believe the Fed is going to cut rates in 2024 and are looking to put new money to work, the biotech sector is a logical place to invest – in the right stocks. While John and Eric aren't sure that the bottom is in for biotech quite yet, they said you don't need to time it perfectly...
They detailed a great opportunity in their newest issue...
Innovations Report subscribers and Stansberry Alliance members can find all the details on this recommendation here.
Weighing the boom-and-bust proposition...
Stansberry Research senior analyst Brett Eversole also recently looked at the biotech sector in a recent issue of True Wealth Systems. As Brett explained...
Biotech stocks are known for their boom-and-bust nature. And given what these companies do, the booms and busts in biotech stocks make sense.
These companies are at the cutting edge of medical research. They develop medications and therapies that can treat (or even eradicate) diseases. And their success hinges on whether an experimental product pans out. So investors tend to get overly excited – or overly pessimistic – about their prospects.
This sector can surge to incredible gains. We saw that in the first year of the pandemic. But those bull runs are often followed by a collapse... which is what we've seen since.
However, the trend has changed, and biotech stocks have "staged a breakout." As Brett wrote...
They soared at the end of 2023. And they hit a multiyear high earlier this month. Take a look...
The rally was a major reversal for a sector that had been taking it on the chin. But biotech stocks could move much higher in the months ahead – even after a big breakout like this.
To see it, I looked at every new 52-week high in biotech stocks. They've happened 19 other times since the data began in 1993. And they tend to lead to slight outperformance. Check it out...
Similar setups saw six-month returns improve from 5.9% to 7.7%. And over a year, the typical gain improved from 12.1% to 13.8%.
Now, this isn't a full-fledged "buy" signal. Brett said biotech stocks have had more down years in the 12 months following their "breakouts" than you might expect (42% of the time)...
So biotech stocks don't always keep soaring after these extremes. But when they do, the returns get much better... In the winning trades, biotech stocks were typically up 17.5% over six months and 35.4% over a year.
So two outcomes are possible from here... Either biotech stocks will reverse back to the pain we saw for most of last year or they'll absolutely soar in the months ahead.
So place your bets carefully, like in the type of high-quality, growing business benefiting from a "tech obsession" in the beaten-down biotech industry that John and Eric just recommended in Stansberry Innovations Report.
One more thing...
It's that time of year... Our publisher Brett Aitken is putting the finishing touches on the first part of our annual Report Card, covering our editors and analysts' performance in 2023. Stay tuned.
New 52-week highs (as of 1/30/24): American Express (AXP), AutoZone (AZO), Berkshire Hathaway (BRK-B), Ciena (CIEN), Costco Wholesale (COST), Cintas (CTAS), Commvault Systems (CVLT), Dell Technologies (DELL), Denison Mines (DNN), FactSet Research Systems (FDS), Comfort Systems USA (FIX), W.W. Grainger (GWW), Intercontinental Exchange (ICE), JPMorgan Chase (JPM), Liberty Energy (LBRT), Nucor (NUE), O'Reilly Automotive (ORLY), Palo Alto Networks (PANW), Procter & Gamble (PG), Parker-Hannifin (PH), Phillips 66 (PSX), Regeneron Pharmaceuticals (REGN), Construction Partners (ROAD), Roper Technologies (ROP), S&P Global (SPGI), SPDR Portfolio S&P 500 Value Fund (SPYV), Stryker (SYK), Cambria Shareholder Yield Fund (SYLD), Trane Technologies (TT), ProShares Ultra Financials (UYG), Visa (V), and Waste Management (WM).
A quiet mailbag today... As always, we love to hear what's on your mind. Send your comments, questions, or anything else to feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
January 31, 2024