The Federal Reserve says rate cuts are coming in 2024... Bad news is still good – for now... Mr. Market's knee-jerk reaction... More of the same on inflation... Why you should own gold... Deflation in China...
The Fed's tone is shifting...
For its third straight policy meeting, a period stretching back to July, the members of the Federal Reserve today decided to keep the central bank's benchmark lending rate right where it is – in a range of 5.25% to 5.5%.
And the Fed members also prepared the market for the idea of multiple rate cuts in 2024... assuming a future in which economic growth slows and the unemployment rate moves higher while inflation doesn't.
The signal to the markets? And I (Corey McLaughlin) am paraphrasing the answer...
The pace of inflation keeps coming down, so there's no need to do anything more. The jobs market is showing cracks, so we'll keep the finger on the interest-rate "pause" button to prevent further breakage... which is likely already coming.
All in all, this stance should be reflected in the short term as "good news" in the stock market. The prevailing cost of money isn't going any higher, nor is it likely in the months ahead. And if anything, rates will be going lower before they ever increase again.
Indeed, on the release of the Fed's latest announcement at 2 p.m. Eastern today, the major U.S. stock indexes instantly popped higher from flat intraday levels...
Wall Street institutions' trading algorithms were likely quick to digest the new language in the first sentence of the rate-setting Federal Open Market Committee's statement...
Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter.
Investors also quickly digested the committee's quarterly economic-projection exercise in which Fed officials penciled in three 25-basis-point rate cuts next year. That's 50 basis points more than they said just three months ago, the last time they published projections.
The committee's "dot plot" – a spread of its members' policy projections – also showed the prevailing thought that four more cuts, totaling a full percentage point, would happen in 2025. Then more cuts in 2026 would bring the federal-funds rate to 2.9%... toward a long-term goal of 2.5%.
The central bank also projected GDP growth of less than 2% in each of the next three years.
The 'bad news' is still good – for now...
Fed Chair Jerome Powell still gave his boilerplate speech about the importance of fighting inflation at the end of his opening remarks of his post-meeting press conference. But the Fed's language in its policy statement and projections, and Powell's commentary taking reporters' questions, marked a "dovish" turn in my estimation.
As Powell said during the press conference...
We are likely at or near the peak rate for this cycle.
The indexes moved higher as Powell spoke...
At the same time, continuing to hold off on rate increases means the Fed sees enough risks ahead – like a weakening jobs market and/or a recession – that now outweigh inflation risks.
And as we've said lately, the start of rate-cutting cycles in U.S. history typically isn't good for the broad stock market. That's especially true when the market is "expensive," as it is now, because rate cuts signal that things aren't great in the economy.
So, we're inching closer to the point where "bad news" might become "bad news" for the markets rather than good. But based on Mr. Market's knee-jerk reaction today, we're not there yet.
The small-cap Russell 2000 Index finished more than 3% higher, and the tech-heavy Nasdaq Composite Index, benchmark S&P 500 Index, and Dow Jones Industrial Average followed, up more than 1%. The 10-year Treasury yield fell to just above 4%, back to what it was in August.
More of the same on inflation...
Today's producer price index ("PPI") report for November from the U.S. government showed prices paid by businesses were unchanged from October and 0.9% higher than a year ago. Both comparisons beat Wall Street expectations.
Combined with yesterday's consumer price index ("CPI") data, the story about inflation remains the same... The pace is continuing to ease from its 2022 highs. And as we've been saying, monthly inflation numbers for the past several months have been on pace for the Fed to meet its intended 2% goal if the pattern continues.
In other words, investors no longer expect the Fed to keep raising rates. Rather, they increasingly believe the central bank will be more likely to cut rates in 2024 if the jobs market continues to deteriorate. Today's Fed messaging only supported this idea, as its members projected a higher, 4.1% unemployment rate not only in the year ahead but also for the next two.
The time to own gold...
On this subject, just yesterday, Gold Stock Analyst editor John Doody published his latest monthly issue and detailed why right now is precisely the time investors want to own gold. As John began...
The best time to buy gold and gold stocks is right before the Federal Reserve shifts to a "loose" monetary policy.
That's when the Fed takes its foot off the "economic brakes" and hits the gas pedal... meaning it lowers interest rates to avoid a looming recession.
John has been on "recession watch" for much of 2023. Without giving too much away, he believes a slowdown is ahead that will cause the Fed to ease up on its run of tight monetary policy. As he writes...
All of [the] economic data suggests that the Fed will cut rates to avoid a recession. And within this context, the gold price action (in the chart below) is looking good...
The metal has made eight trips above $2,000/oz since mid-2020. Given the favorable economic indicators mentioned above, we think the Fed will act and the metal's price will resume its trek higher. The $2,000/oz price ceiling will, therefore, become the floor for the years ahead.
In the past few days, gold's price per ounce had taken a slight dip to just under $2,000, coinciding with economic data that suggests the Fed rate cuts might come later in 2024 than previously expected. But gold remains in a longer-term uptrend and is trading nearly 10% higher for the year. And after the Fed meeting today, gold shot 1% higher to back above $2,000 per ounce.
If or when the Fed's rate policy turns, John explains, history shows gold has achieved 4 times the return of U.S. stocks. Even better, his Gold Stock Analyst Top 10 stocks returned 17 times higher than the S&P 500's gains in similar Fed "easing" periods since 2001.
Gold Stock Analyst subscribers and Stansberry Alliance members can find the entire issue here, complete with a review of all of John's open recommendations right now.
And some more about deflation...
We dived yesterday into the subject of deflation – in the context of the other two "flations," inflation and disinflation.
We acknowledged that we might be putting the cart before the horse – after all, CPI in the U.S. and the Fed's preferred "core" personal consumption expenditures ("PCE") measures are still showing 3% annual growth.
But we explained why it's important to think about the possibility of broader deflation showing up in the economy... and what might happen to stock prices and other assets when that happens.
Look no further than China...
The world's second-largest economy is grappling with deflation in a big way.
The country is dealing with several economic challenges. In particular, it hasn't recovered from its extended pandemic lockdowns, has seen less foreign investment, and has suffered major blows to its once-mighty real estate industry.
Youth unemployment was reported to be at a record-high of 21% in June... at which point the Chinese government said it would stop publishing the data.
Since the start of 2020, China has seen 4.7% deflation, based on CPI data. It's the only country in the world where deflation is occurring, and the trend is ongoing. As Stansberry Research Asia-based analyst Brian Tycangco wrote on X, formerly known as Twitter, on Monday...
Prices of goods at the factory and retail level fell more than expected in November in a worrying sign that deflation may become a problem for Beijing's policymakers. The Consumer Price Index fell 0.5% last month, well below the 0.1% decline the market was anticipating and much weaker than the -0.2% CPI posted in October.
Consumer prices have been bobbing up and down since April 2022, but this is the first time CPI declined two months in a row this year.
Meanwhile, the Producer Price Index fell 3% in November compared with a 2.6% drop in October.
It was worse than the 2.8% decline the market was expecting and the 14th straight month of YoY declines in the PPI. It indicates that manufacturers are still struggling and may result in even weaker CPI print going forward.
A real-time example...
The worst of recent Chinese stock performance occurred as deflation was emerging in 2021 and continuing in 2022. This matches what we talked about yesterday regarding prior periods of deflation in the U.S. But in China, the news hasn't gotten better.
The 14-month period of Chinese PPI deflation Brian mentioned began in September 2022. Since that time, China's benchmark Shanghai Composite Index is essentially flat – we suspect because there have been no obvious government "rescue" plans to address deflation just yet.
As Brian wrote on X today...
During a 2-day Central Economic Work Conference in Beijing, the central government renewed its promise to promote stable growth next year. This reflects the government's ongoing concerns about slowing growth...
It mentioned the need to diffuse risks in the property sector, including making sure that companies' financing needs are met within reason. But, as expected, there was a lack of detail in the wording and no mention of any strong stimulus measures to help ensure deflation doesn't take hold of the economy.
So that's what deflation with no response looks like. It's not pretty. The good news, at least for investments outside of China? So far, Chinese deflation hasn't spread around the world, except when we see deflationary "apparel" data in U.S. inflation reports.
It's worth keeping an eye on, though.
As we explained yesterday, deflation is typically "bad news" for stocks in general as lower prices begin and then persist in an economy. It's what happened for seven consecutive years leading up to what became known as The Great Depression.
And it happened in a handful of other more narrow periods in the 1940s and '50s, and then in the Great Recession 15 years ago.
In the U.S., these times got scary enough for central bankers that they tended to make moves to reverse the trend – be it through cutting interest rates or employing whatever newfangled money-printing or stimulus plan they can come up with.
In the process, history shows the response to deflation boosts stock prices significantly. But we haven't seen this happen yet in China.
New 52-week highs (as of 12/12/23): ABB (ABBNY), Adobe (ADBE), Applied Materials (AMAT), Advanced Micro Devices (AMD), A.O. Smith (AOS), Brown & Brown (BRO), Costco Wholesale (COST), Cintas (CTAS), D.R. Horton (DHI), Electronic Arts (EA), Enstar (ESGR), W.W. Grainger (GWW), Huntington Ingalls Industries (HII), ICON (ICLR), Ingersoll Rand (IR), Iron Mountain (IRM), iShares U.S. Aerospace & Defense Fund (ITA), JPMorgan Chase (JPM), Lennar (LEN), Linde (LIN), London Stock Exchange Group (LNSTY), Motorola Solutions (MSI), NVR (NVR), Palo Alto Networks (PANW), Parker-Hannifin (PH), ProShares Ultra QQQ (QLD), Qualys (QLYS), Construction Partners (ROAD), Roper Technologies (ROP), Invesco S&P 500 Equal Weight Technology Fund (RSPT), SentinelOne (S), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), VanEck Semiconductor Fund (SMH), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 (SSO), Stellantis (STLA), Trane Technologies (TT), Sprott Physical Uranium Trust (U-U.TO), Visa (V), Vanguard S&P 500 Fund (VOO), and Waste Management (WM).
A quiet mailbag today. Let us know what's on your mind, as always, with an e-mail to feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
December 13, 2023
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