The Next Point

What the Federal Reserve signaled today... Rate cuts – eventually... The latest read on inflation... Advice from Roger Federer... He sounds like a market wizard... John Engel on the Stansberry Investor Hour...

Here's the latest from the Federal Reserve...

The Fed's benchmark lending rate range will remain steady for now (as it has for nearly a year, a streak stretching to July 2023). The central bank sees inflation slowing, a "relatively tight, but not overheated" labor market, Fed Chair Jerome Powell said. And it expects to lower rates once, maybe twice, over the rest of the year.

This summary was all wrapped in the messaging from the Fed's latest two-day meeting, which concluded today.

As a calm and seemingly comfortable Powell said at a post-announcement press conference, he thinks the Fed's policy is "restrictive" (i.e., no more hikes needed). And the presumption is "eventually you will see real weakening in the economy," though he hasn't seen it yet...

This is about looking at the incoming data and asking, "How much progress are we making on inflation and how is the rest of the economy doing? Is the labor market still strong?" That's what we're thinking about...

We can't know what the future holds. But in the meantime, we've made pretty good progress on inflation with our current stance...

The major U.S. indexes were already higher heading into the Fed's afternoon announcement after this morning's consumer price index ("CPI") report for May was taken favorably by investors. The latest Fed signals in the afternoon were perceived as bullish, too.

The benchmark S&P 500 Index and tech-heavy Nasdaq Composite Index closed at new all-time highs...

The 'dot plot'...

As we said heading into this Fed meeting, it would be one of the central bank's gatherings in which its members publish quarterly economic projections...

The Fed's new "dot plot" projections show median expectations for 2.1% GDP growth by the end of this year, a 4% unemployment rate, 2.8% core inflation, and a single 25-basis-point rate cut, though several wrote down two cuts to come by the end of 2024.

In March, the Fed projected the identical GDP and unemployment rate and slightly lower inflation and 50 more basis points of cuts in 2024. The higher inflation data of earlier this year has bumped back the timeline for cuts, but not the concept.

While only projecting one cut and perhaps two this year (as 15 of 19 Fed members did), the central bank now projects 100 basis points of cuts in 2025 and then another 100 basis points in 2026. That's when it thinks inflation will finally settle at its 2% annual goal.

As Powell said...

Rate cuts that might have taken place this year [could] take place next year. There are fewer rate cuts in the median this year, but there is one more next year. So if you look at year-end 2025 and '26, you're almost exactly where you would have been, just it's moved later...

Ultimately, we think rates will have to come down to continue to support [growth and a strong labor market]. But so far, they haven't had to. And that's why we're watching so carefully for signs of weakness. We kind of see what we wanted to see, which was gradual cooling in demand, gradual rebalancing in the labor market while we continue to make progress on inflation.

It sure appears like the Fed wants to follow the lead of the European Central Bank and Bank of Canada, which cut rates last week, the first time either of the major banks has done so since 2019, before our 40-year-high inflation nightmare.

Powell, of course, said the central bank will continue to weigh incoming data as well, like that which arrived just a few hours earlier. He said...

If the economy remains solid and inflation persists, we are prepared to maintain the current target range for the federal-funds rate as long as appropriate. If the labor market were to weaken unexpectedly or if inflation were to fall more quickly than anticipated, we are prepared to respond...

The latest inflation read...

As for this morning's CPI report, it showed inflation holding steady from April to May. That's better than the expectations for 0.1% growth, though it still means this basket of prices was 3.3% higher than it was a year ago.

Gas prices, down 3.6% last month, were a significant factor in the flat headline monthly growth. This drop helped offset rising costs for food (up 0.1%), shelter (up 0.4% for the month and notably 5.4% for the year), and health care (up 0.3%).

Bond yields fell dramatically after the pre-market inflation report, with the 10-year Treasury down 12 basis points to under 4.3%. In the first hour of trading, the S&P 500 Index was up 1% and the small-cap Russell 2000 Index was 2.5% higher.

So, a reminder: gas prices matter to this inflation data point... and, thus, to market expectations for what the Fed might do. This includes the prevailing idea that the central bank will lower borrowing costs as inflation "eases" and the job market weakens. And Powell said today...

We'll have to see where the data light the way. The economy has repeatedly surprised forecasters in both directions, and today was certainly a better inflation report than almost anybody expected.

But there's also this reality... Many prices are still up 20% or more since before the pandemic-stimulus era... People don't like it, of course.

Lower gas prices last month helped paint a surface picture of continued "disinflation," or prices rising by a slower price. But if energy costs were any higher in May, this CPI report would have looked worse, and investors would likely have digested it very differently.

To that point, today, oil and gas prices are at the same levels they were in May. So, as we sit here nearly halfway into June, we expect no relief from energy prices when the next round of CPI numbers comes out a month from now.

That didn't stop Mr. Market from being overjoyed, though.

Quote of the week (from Roger Federer)...

Perhaps you've seen this, a commencement speech from tennis great Roger Federer at Dartmouth College that has gone viral in the last few days. For good reason, I say...

Federer, winner of 20 major men's singles titles and a record eight men's Wimbledon titles, revealed an insight into his mindset and how he won so much. In short, it wasn't as easy as it might have looked. He's human...

In the 1,526 singles matches I played in my career, I won almost 80% of those matches... Now, I have a question for all of you... what percentage of the points do you think I won in those matches?

Only 54%.

In other words, even top-ranked tennis players win barely more than half of the points they play.

When you lose every second point, on average, you learn not to dwell on every shot...

Here's why I am telling you this.

When you're playing a point, it is the most important thing in the world.

But when it's behind you, it's behind you... This mindset is really crucial, because it frees you to fully commit to the next point... and the next one after that... with intensity, clarity, and focus.

The truth is, whatever game you play in life... sometimes you're going to lose. A point, a match, a season, a job... it's a roller coaster, with many ups and downs...

You want to become a master at overcoming hard moments. That to me is the sign of a champion.

The best in the world are not the best because they win every point... It's because they know they'll lose... again and again... and have learned how to deal with it.

You accept it. Cry it out if you need to... then force a smile.

You move on. Be relentless. Adapt and grow.

After digesting the fact that Federer only won just more than half of the points he ever played as a pro and remembering he's also a billionaire (making more money off the court than on), I thought of how many of the great traders in the world often say a similar thing...

Take a spin through the Market Wizards books...

Those interviewed by author Jack Schwager at some point accepted that they are not going to win every single one of their trades.

In fact, they acknowledge they will probably lose more individual trades than they win. As Jason Shapiro, one of these "Wizards," told Dan Ferris and me on an episode of the Stansberry Investor Hour earlier this year...

You're not going to make money over time in the markets by being smarter than the market. You're just not. Look, if you're an investor, it's a different thing. If you're a long-term, "own the stock market" investor, good for you. That's a great thing. If you're trying to be a trader and trade the markets long and short and this and that, you got to know that the answer is not you're going to make money because you're better at predicting the future than other people, because you're not. Nobody is.

You're going to make money because you're better than other people at cutting losses and letting winners ride. That's where you're going to make money. That's it. I've said it to people before. When they call me a market wizard, I say, "If I am a market wizard," and the reason is because I cut losses very, very well. I'm a market wizard because I'm really good at losing money. That's it, man. That's it. The rest is just there to fool you, man. It's going to fool you and it's going to hurt you over time.

That sounds like Federer in a way... The key to long-term trading success is soldiering on, weighing risk and reward on every trade (just like on every shot or point in tennis), and knowing when to take a loss and move on to another opportunity.

Tennis may be easier. The rules of the game force you to take a loss at the end of a point that you didn't win. And you must move on, or risk things spiraling out of control if you allow losing a previous point to carry over into how you play the next one.

In investing, you need to first figure out your own rules. You decide when you've lost (as with a stop-loss strategy or a recognition that your investment thesis has changed) and have the confidence to focus capital elsewhere.

It's easier said than done, of course. But we thank Federer for the reminder via his words of wisdom, and for sharing how the mind of one of the greatest athletes of all time works. You can watch his entire speech here, or you can read a transcript here.

New 52-week highs (as of 6/11/24): Apple (AAPL), Applied Materials (AMAT), Alpha Architect 1-3 Month Box Fund (BOXX), Coca-Cola Consolidated (COKE), Costco Wholesale (COST), Intuitive Surgical (ISRG), Nuveen Preferred & Income Opportunities Fund (JPC), Eli Lilly (LLY), Microsoft (MSFT), Motorola Solutions (MSI), Micron Technology (MU), Nuveen California Quality Municipal Income Fund (NAC), Neuberger Berman Next Generation Connectivity Fund (NBXG), ProShares Ultra QQQ (QLD), Regeneron Pharmaceuticals (REGN), Invesco S&P 500 Equal Weight Technology Fund (RSPT), ProShares Ultra S&P 500 (SSO), Texas Pacific Land (TPL), Vanguard S&P 500 Fund (VOO), Verisk Analytics (VRSK), and the short position in Teladoc Health (TDOC).

In today's mailbag, feedback on yesterday's edition about "crisis spending" and an antidote for it... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I have been emailing this over and over for over 10 years to everyone I know [which you wrote in yesterday's Digest].

Every time the government creates a new dollar (or a trillion), it devalues every existing dollar... which leads to more inflation... and more of the same problems in various walks of life you've likely become familiar with over the years.

"It should be in giant letters, bolded and underlined. It should say, read this again. Get it burned into your brain.

"There is no inflation. There is currency devaluation. By the design of every currency created, therefore designed to lose purchasing power, ON PURPOSE...

"You just saved a bundle learning what is really going on. Read that again. Burn it into your brain." – Subscriber Bernard B.

"Response to [yesterday's] Digest (and many similar Digests): I vote for changing the name of the Stansberry Digest to 'The Stansberry Police Blotter'." – Subscriber Gary S.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 12, 2024