The Fed's Latest Signals Sink Stocks
The central bank cuts rates again, but projects fewer to come... What Fed Chair Jerome Powell said today... What could come next... The biggest surprise of 2025?... Nvidia is in a 'correction'...
The Federal Reserve is catching up on inflation...
As was widely expected, the central bank cut its benchmark lending rate by another 25 basis points after its two-day policy meeting wrapped up today.
What intrigues us, though, relates to what might come next...
And it's what we've been anticipating... The Federal Reserve has been forced to acknowledge that the pace of inflation is picking up again. And, today, Mr. Market got the message.
In the Fed's latest quarterly economic projections released today, Fed members projected two more 25-basis-point rate cuts in 2025. That might sound like good news, but it's all relative. (And keep in mind, these projections almost always turn out to be wrong.)
The last time the Fed did this exercise three months ago, it projected four rate cuts, not two. The Fed is also now anticipating 2.5% inflation by the end of 2025, rather than its closer-to-2% projection last quarter... with little change in unemployment and GDP expectations.
So the central bank is now signaling it doesn't think it will be providing as much juice to the economy moving ahead. The reason is what we've been saying for weeks: higher inflation numbers over the past few months.
During a post-meeting press conference this afternoon in Washington, D.C., Fed Chair Jerome Powell revealed that today's rate cut was a "closer call" than people may have envisioned, and he explained that the future policy outlook is tied to the recent high(er) inflation numbers (like we have written about here and here)...
A slower pace of cuts [for next year] really reflects both the higher inflation readings we've had this year and the expectations that inflation will be higher... Nonetheless, we see ourselves as still on track [to continue] to cut.
Powell suggested during the press conference that the Fed's projected rate cuts will still happen. But to me (Corey McLaughlin), it sounds like they might not... depending on the path of the economy, labor market, and inflation. You see, Powell said he believes the Fed has already lowered rates "significantly closer to neutral," which had been a goal.
The major U.S. stock indexes sold off this afternoon on the news and continued moving lower as Powell spoke.
The benchmark S&P 500 Index closed down roughly 3%, the tech-heavy Nasdaq Composite Index was down almost 4%, and the small-cap Russell 2000 Index lost nearly 5%. The Dow Jones Industrial Average was down for a 10th straight day, off 2.7%.
Meantime, bonds also sold off (and yields rose). The 10-year Treasury yield topped 4.5% during late-afternoon trading, its highest level since late May. It makes sense: If you listen carefully, you can hear the Fed admitting the inflation "fight" is far from finished. Powell, almost casually, said this today (emphasis added)...
We and most other forecasters still feel that we are on track to get down to 2%. It might take another year or two from here. But I'm confident that's the path we're on.
Yesterday, we wondered if Powell and the Fed would send new signals to the market acknowledging higher inflation and less help coming. Today, we got the answer.
The biggest surprise of 2025?...
Regular readers know I have been warning about the pace of inflation reaccelerating.
The trend in recent months has suggested that the economy is becoming "too hot," which could encourage the Fed to pause its rate cuts or even hike interest rates next year instead of continuing to cut them.
But we're humble enough to know a few things...
First, the market doesn't necessarily care what we think. And, second, we're always open to other ideas. That's one way to anticipate moves that the mainstream might not be talking about, like today's market reaction to the Fed.
We also read one other view this morning worth thinking about... It comes from Stansberry Research senior analyst Mike Barrett. Mike is the editor of Select Value Opportunities and a longtime analyst of Dan Ferris' Extreme Value.
In short, Mike wrote in today's Select Value Opportunities that "next year's biggest surprise" might be that inflation will actually come in lower than many people might think. This has to do with the last mile of the Fed's inflation fight – housing inflation. As Mike wrote...
In the November [consumer price index ("CPI")] report released last week, we were surprised by a specific reading on housing inflation... Owners' equivalent rent ("OER") of residences – the estimated rent an owner would earn if they rented rather than owned their residence – rose just 0.2% on a seasonally-adjusted basis, from October to November.
That was the smallest change in more than three years (since April 2021).
Given its importance in calculating the CPI, investors pay attention to the OER. In November, this metric accounted for 27.1% of the CPI and helped reduce the housing subindex from 5.2% to 4.1% year over year. The bottom line is that housing inflation could significantly improve in 2025.
Combined with the lower energy prices we anticipate, a much lower headline CPI could be 2025's biggest surprise.
This would give the Fed room to continue lowering the fed-funds rate. We expect longer-term bond yields to follow the CPI lower, as bonds become more attractive when inflation diminishes.
Mike has been spot-on about the path of inflation in recent years. This time last year, he was writing about a potential inflation bump in early 2024 that might delay interest-rate cuts. That's exactly what happened.
If housing inflation does indeed cool next year – which has been something we haven't seen yet but is something Powell said today that he's looking for – and the Fed decides to keep lowering borrowing costs, that would provide a tailwind for the market in general – especially after today when the central bank lowered rate-cut expectations.
As Mike wrote today, with more rate cuts, mortgage rates should fall, too, which would improve home affordability and entice prospective buyers back into the market. That would benefit associated sectors, like homebuilders. We'll have to wait to see what happens.
Switching gears...
Chipmaker and AI darling Nvidia (NVDA) has lost some steam...
Yesterday, the stock closed more than 12% below its all-time high from November. That means the stock has entered a "correction," a label many market observers ascribe to a fall between 10% and 20%.
Some of this might be "rotation" because it looks like folks may have found another AI favorite in chipmaker Broadcom (AVGO). Since Nvidia's high on November 7, Broadcom has drastically outperformed Nvidia and is up more than 30%.
That won't make any "latecomers" to the Nvidia party very happy...
The company has been the poster child for AI over the past few years, with its chips and data centers essentially becoming the only game in town to run AI infrastructure, which has become extremely in demand.
Nvidia shares have returned more than 11X since a low in October 2022 and have risen for most of the past two years. The stock surged 158% from the start of the year through the end of June.
But in the almost six months since, Nvidia has only returned about 5%. And as we reported in November, shares fell by more than 2% immediately after Nvidia posted another blowout quarterly earnings report and outlook.
Here's a one-year chart of Nvidia shares...
Now, a 5% return in six months is a solid performance for most stocks. But it can be disappointing for folks who were looking to see the huge gains Nvidia had become known for.
The market reaction to Nvidia's last earnings report looked like a stock that was having trouble meeting "sky-high expectations."
Times like this can be hard to navigate...
Our theme over the past two days has been "greed." The emotional roller coaster of a hot stock cooling off is one of the consequences of mistimed greed. Folks who bought into the AI hype late may not have made the money they expected to in Nvidia – one of the hottest stocks of the trend.
That's not to say Nvidia still isn't a great business – (it's a "legal monopoly," as legendary investor Louis Navellier discussed with Dan Ferris and me on this week's Stansberry Investor Hour).
But it's a reminder to buy shares of great companies at reasonable – or downright cheap –prices before the "crowd" gets in. These times don't come around every day. And the midst of a "correction" may be a great time to buy a stock if you still love it.
For example, as Mike wrote in his Select Value Opportunities letter just last month, he still considers Nvidia shares a good "value" based on his expectations for continued growth ahead, and other overlooked factors like the impact of continued "[Donald] Trump tax cuts."
As Mike wrote...
The current share price... implies revenue growth below 20% per year going forward. That's unreasonably low, considering that demand for Nvidia's chips is very strong and should accelerate once Trump's tax incentives become permanent.
To be conservative, we're modeling revenue growth of about 5 percentage points higher, or 25% per year. This produces an intrinsic value estimate of $210 per share, or 40 times earnings before interest, taxes, depreciation, and amortization in the next 12 months.
Nvidia shares closed near $130 today and finished down 1%, after trading higher before the broad selloff this afternoon. Mike's subscribers and Stansberry Alliance members can find his full analysis here. We'll also point out that Nvidia has an "A+" grade, according to our proprietary Stansberry Score.
Another take on Nvidia...
Our friend and Wall Street legend Marc Chaikin, the founder of our corporate affiliate Chaikin Analytics, built his proprietary Power Gauge to take emotion out of investing decisions.
Broadly speaking, the Power Gauge combines fundamental and technical analysis with other factors Marc believes are important from his 50-year-plus career as a professional investor to deliver an easy-to-understand rating on the stock.
This system has a great track record... It flagged 44 of the 50 top-performing stocks of 2024 before their massive gains.
So let's take a look at what the Power Gauge is telling us about Nvidia today...
As you can see, the Power Gauge rates Nvidia as a "Neutral+" stock, with weak ratings on Technicals. That makes sense, with the stock entering a correction and trading below its long-term trend line.
The Power Gauge also ranks Nvidia low on Financials, specifically its price-to-sales valuation (it's expensive, as we've also pointed out in these pages) and has relatively low free cash flow, though the company also has a low long-term debt-to-equity ratio.
But there are some positives... Wall Street experts love Nvidia, and it has a "very strong earnings performance" and high return on equity.
If Nvidia shares climb higher, that could be enough to flip its Technicals – and overall Power Gauge – rating into more bullish territory. That could signal the start of the next leg higher for this AI darling.
To get more of Marc's insights...
Yesterday, Marc went live in a new presentation with his "road map for 2025." You see, he has a big market prediction for 2025, based off a rare signal – with a 93% success rate – that recently flashed.
As Marc explains, understanding this signal and putting it to work using his Power Gauge system could be the difference between seeing multiple 100%-plus potential gains in your portfolio in the year ahead versus multiple 30% to 50% losses, which he predicts many average investors are going to suffer.
If you didn't catch Marc's message yesterday, you can watch a replay right here.
You'll learn much more about his outlook for 2025 and how he plans to navigate the next 12 months. Plus, just for tuning in, you'll hear a pair of free recommendations – one stock to buy right now and another to avoid at all costs – and details about his 100% satisfaction guarantee to try his work.
New 52-week highs (as of 12/17/24): London Stock Exchange Group (LNSTY) and Visa (V).
In today's mailbag, feedback on yesterday's edition where we discussed inflation and Fed policy... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Thanks, Corey, for bringing me and all of your readers solid unbiased information...
"[As for that], has anyone noticed that the outgoing Biden administration is doing everything they can to put Trump into a rotten incoming situation. For instance, consider the escalation of military action (missiles being fired at Russians with U.S. military personnel assistance) in Ukraine.
"I think the cutting of interest rates is just another step toward weakening the economy by pouring gasoline on inflation. Just another problem for the incoming Trump administration to deal with. The media will spin this 'sudden spike in inflation' to have been 'caused by Trump tariffs'. It has actually been caused by pandemic ultra-spending by our government. Exactly how many of the evil Trump tariffs did the Biden administration remove?
"Additionally, the median 30-year mortgage since 1971 is 7.37%. Interest rates are normal! We are just exiting an abnormal period of time where people were receiving negative interest on their deposits and mortgages were dirt cheap. The economy just sucks. Wages aren't keeping up with the cost of living. I think we have a tough situation going forward for the next 5 to 10 years, or possibly longer. Cutting rates is just going to exacerbate and reinvigorate what is no-doubt STICKY INFLATION." – Subscriber Greg S.
All the best,
Corey McLaughlin with Nick Koziol
Baltimore, Maryland
December 18, 2024