The Magic Words

Fed fuel... A balance-sheet change is coming... Two magic words from Europe... Central banks are often wrong... Bitcoin slips from its all-time high... Kudos to Crypto Capital editor Eric Wade... Weighing fear and greed in cryptos...

The market got a late-day shot of Fed fuel...

Heading into this afternoon, the major U.S. indexes were mixed, and most U.S. Treasury bond yields were a touch lower. Gold and bitcoin were little changed (after the latter fell 15% from a new high of around $73,000 last week... more on that momentarily).

The picture changed right at 2 p.m. Eastern time – and continued afterward. That's when the Federal Reserve posted its latest policy statement and economic projections for the rest of the year (and those beyond)... and then when Fed Chair Jerome Powell started talking.

The major U.S. indexes moved higher. The benchmark S&P 500 and tech-heavy Nasdaq Composite Index closed up roughly 1%, and the small-cap Russell 2000 finished 2% higher. Gold and bitcoin prices rose, too... all while yields remained steady.

What'd the Fed and noted astrologer Powell say that made Mr. Market giddy?...

First, as expected, the Fed kept its target federal-funds range between 5.25% and 5.5%, where it has been since last June... Second, they signaled multiple rate cuts to come later this year... And third, the bank said it would keep trimming its balance sheet, but less quickly than it has been for the past two years.

In his post-meeting press conference, Powell, for the first time, indicated the central bank would "slow down" the pace of balance-sheet reduction "fairly soon," he said. "We want to avoid any kind of turbulence," he continued, referring to potential troubles with the banking system after the central bank chopped $1.5 trillion from its balance sheet since the spring of 2022.

A well-received mix...

In its quarterly projections, notably, the Fed members also maintained an outlook for three 25-basis-point cuts to its suggested fed-funds rate later this year... inflation to be 2.4%... plus GDP around 2% for this year (higher than the 1.4% it projected in December)... and an unemployment rate at 4%, slightly lower than it thought three months ago.

Recall that I (Corey McLaughlin) wrote yesterday that I was weighing two possible outcomes going into today...

If we hear higher expectations for growth and inflation – and Fed interest rates – or any of the three, it could lead to a haircut for dollar-denominated assets. Alternatively, Fed numbers and a Powell press conference supporting the status quo could just keep the bullish theme going.

Today, the Fed gave us the latter, and the market loved it.

The Fed is keeping on with the idea that the pace of inflation is coming down enough, the labor market isn't cratering, and economic growth will continue to pick up – even before rate cuts that the central bank is also promising.

Add in the idea of balance-sheet reduction slowing down (but the Fed still having the ability to put liquidity into areas that might need it), which could be looked at as a kind of stimulus without moving rates. All in all, Mr. Market got happy this afternoon.

Across the pond...

Earlier today, several hours ahead of the Fed's announcement and Powell's press conference, we also got signals from the European Central Bank ("ECB"). It wrapped up a policy meeting today, too...

The highlights... ECB President Christine Lagarde suggested the European equivalent of the Fed could cut its bank-lending rate at its meeting in June.

Without explicitly saying it, she laid out the factors that the ECB string-pullers will weigh in the next few months. This included allusions to inflation and wage growth, both of which have been slowing in Europe. As Lagarde said at a press conference in Frankfurt, Germany...

If these data reveal a sufficient degree of alignment between the path of underlying inflation and our projections, and assuming transmission remains strong, we will be able to move into the dialing back phase of our policy cycle and make policy less restrictive.

We haven't heard the words "less restrictive" uttered by a notable central-bank official in a while... Those can feel like magic words for many investors.

Eurozone inflation cooled to a reported 2.6% annual growth in February. That's slightly higher than the consensus figure that economists were expecting, as was the 3.1% growth in core inflation (which leaves out volatile sectors of energy and food prices). Still, the long-term trend is down for the pace of inflation from its year-over-year peak above 10% in 2022.

Lagarde also left open the possibility that the ECB might not cut rates, or by as much as some might think (investors are thinking three cuts "over there" as well)... and said the ECB would make decisions "meeting by meeting." Its next meeting is in a few weeks, in early April, followed by another in June.

Other ECB officials have recently suggested that pairing a first rate cut with the central bank's next round of quarterly economic projections (like June) has advantages. The head of the Dutch central bank, Klaas Knot, told the media last week...

Personally, I penciled in June for a first rate cut. Where will we take it from there? We are data-dependent, so I would focus on those meetings in which we have the most data available, which are the meetings in which we have new projections, so September and December.

I am willing to bet Lagarde and Powell have been talking with each other about the same idea. They do chat about these things (Powell has admitted so publicly in the past), and the Fed's next quarterly economic projections are also due out at its meeting in June.

Keep in mind, history suggests that the markets respond well to this kind of policy "pivot" toward incremental rate cuts. That's unlike the dramatic "emergency" cuts in the midst of a crisis, which we've gotten used to the past 20 years or so, which are associated with plunging markets.

One related note...

I occasionally get feedback when we talk about these central banks asking, "Why are you quoting these people? You can't possibly believe them and their data..."

We're not naïve here.

Consider this Digest from back in December 2021. We quoted Lagarde saying that she was looking at Eurozone inflation, which had been on the rise for three quarters, "like a hump," implying it would slow shortly. She said then...

We see [inflation] as a hump and a hump eventually declines – and this is what we project for 2022, that inflation will decline over the course of 2022.

Of course, as we just said, the pace of inflation continued to rise throughout much of 2022 instead.

The analogy seemed ridiculous at the time, given what we were seeing – continued fiscal stimulus here and near-zero interest rates around the world fueling inflation – and the terrible predictions the ECB and Fed had been making about inflation for more than a year.

And we said so. Here's our response to Lagarde in that same Digest...

Just like, they said, inflation wouldn't be a significant thing for very long in 2021...

Similarly, the Federal Reserve this time last year projected inflation of 1.8% for this year, according to its preferred gauge. That was wrong, with that measure checking in most recently at a 5% year-over-year rise in October.

Good thing we never believed the "transitory" story anyway.

Either the Fed was sand-bagging everyone (entirely possible) or they just were that bad at seeing the obvious (also possible).

We're not saying what the Fed or ECB is saying is or will be 'right'...

In fact, there's a pretty good chance that what they're projecting won't happen.

We covered the possibility earlier this week when we talked about the recent rise in oil prices over the past few months. As we wrote, there are good reasons to believe that the inflation numbers remain higher for longer... and thus to expect interest rates to stay higher for longer, too.

But the market doesn't care what we think.

So, we've found it useful to also monitor what Lagarde, Powell, et al. are saying because enough investors hang on to central bankers' words. If for nothing else, the narrative they sell provides an anchor for what financial conditions to expect in the months ahead and a backdrop for the market.

Finally, today, some kudos to our Crypto Capital team...

Bitcoin, the world's most popular cryptocurrency, recently approached and then hit new all-time highs. Ethereum, the world's second-largest crypto by market cap, approached its all-time high as well. Along the way, we've been sharing updates from Crypto Capital editor Eric Wade and his team...

We also noted last week that bitcoin had crossed the $70,000 mark to new all-time highs... This was previously a key level of technical "resistance" that could turn into potential technical "support" – if bitcoin were to continue trading above it.

We warned that "if it falls below this level, it could be a sign that more downside is ahead." And we explained how you should expect volatility in cryptos, as usual, and amid a breathtaking rally over the past year.

Well, bitcoin fell below $70,000 later last week and roughly 15% over the past week, through earlier today...

Last week, Eric also warned his Crypto Capital subscribers about a potential pullback in bitcoin in his weekly video update, writing in its introduction...

While there are still plenty of bullish catalysts for cryptos – including the upcoming bitcoin (BTC) halving – prices have risen so fast recently that we're due for a pullback. It could result in a small dip, a huge sell-off, or a painful correction.

The Crypto Fear & Greed Index also indicates we could see a sell-off soon, and we even saw tests of the bitcoin Relative Strength Index ("RSI") [last] week. As we've said before, the RSI isn't always a reliable indicator. But if enough people believe it's signaling a sell-off, it could trigger a wave of selling.

That's why we always stress the importance of making sure your position sizes and the risks you're taking are right for you, even during a bull market.

Sage advice, and kudos to Eric and his team.

For more guidance on all things crypto...

Just yesterday, Eric and analyst Stephen Wooldridge II published a monthly Crypto Capital issue with a brand-new recommendation with "5X potential returns over the next 12 to 24 months" from what they called the "world's computer."

Eric and Stephen also explained in detail what they mean about a blockchain-powered solution that could reshape the Internet... and provided an update on the crypto market generally.

For instance, Eric and Stephen like to track the Crypto Fear & Greed Index, published by Alternative.me, to gauge broad sentiment among crypto investors. This indicator measures a mix of volatility, momentum, trading volume, social media metrics, and market caps. Yesterday, they wrote...

Right now, the Fear & Greed Index sits at 77. That's five points higher than last month's reading of 72, but lower than last week's reading of 88. [Editor's note: As of writing today, it's around 74.] This tells us investors are still excited about the future value of cryptos as a whole... which makes sense given bitcoin's recent highs. But investors are showing a bit of caution since bitcoin has pulled back from those highs over the past few days. We'll have to wait to see how far this rally goes, but the general sentiment is optimistic.

Existing Crypto Capital subscribers and Stansberry Alliance members can find the entire issue here. And, if you don't have access already, stay tuned to the Digest and your inbox to hear more from Eric soon.

He's working on a brand-new presentation that should be available within the next few weeks. You won't want to miss it. Remember, in January, Eric raced to put together an urgent message about the crypto bull market he expected this year. That was spot on. You'll want to hear whatever he shares next.

New 52-week highs (as of 3/19/24): Atkore (ATKR), AutoZone (AZO), Cencora (COR), Pacer U.S. Cash Cows 100 Fund (COWZ), Disney (DIS), Dorchester Minerals (DMLP), Enterprise Products Partners (EPD), Enerplus (ERF), Diamondback Energy (FANG), W.W. Grainger (GWW), JPMorgan Chase (JPM), Motorola Solutions (MSI), NVR (NVR), Oracle (ORCL), O'Reilly Automotive (ORLY), Ferrari (RACE), ProShares Ultra S&P 500 (SSO), Stellantis (STLA), Cambria Shareholder Yield Fund (SYLD), TFI International (TFII), Travelers (TRV), Tenaris (TS), Trane Technologies (TT), Textron (TXT), ProShares Ultra Financials (UYG), Visa (V), Vanguard S&P 500 Fund (VOO), Waste Management (WM), Advanced Drainage Systems (WMS), and W.R. Berkley (WRB).

In today's mailbag, more feedback for our colleague Ken Millstone, who has been telling his story about trying one of the GLP-1 weight-loss drugs... and why he, and we, think they offer a tremendous investing opportunity... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thank you to Ken Millstone... Of course I'm interested in stock picks, and of course I put some money into the two picks recommended.

"But I really want to thank you for your story. My waistline has needed help for most of my life, and nothing of the many things I've tried have worked for any length of time, so naturally I've been interested in, though skeptical of, these new drugs for a couple of years. Your story helped put me over the top to talk with my doctor, and he actually brought up the topic first! Then Oprah's special helped to confirm my decision.

"So now I'm in possession of a prescription, hoping that I'll be able to get it filled soon.

"Thank you again, and best wishes to you for your continued success and improved health." – Subscriber Laura O.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 20, 2024