The first Fed day of the year has arrived.   While there’s widespread agreement that rates will be held steady today, according to the CME’s FedWatch tool, markets are pricing higher probabilities of cuts at other meetings this year. Looking six months out shows the market is giving a greater than 50% chance of rates being cut by at least a full percentage point from the current range of 5.25-5.50%.  While time will tell what Powell and company decide, we would note that price action of the S&P 500 intraday on all Fed days since 1994 (when the FOMC first began announcing its decision on the same days as the meeting) when the FOMC holds rates steady has historically been less volatile, particularly post-decision, than when rates are cut or raised.

We would also note that the S&P 500 is currently trading lower by 0.86% as of this writing today in the wake of poorly received mega-cap earnings of Alphabet (GOOGL) and Microsoft (MSFT).  While those drags on the market are independent of the Fed, that negative tone could lead to the first decline on a Fed day since the September meeting. As shown below, the meetings of the past couple of months have offered a positive change in tone after the S&P 500 largely fell on Fed days throughout late 2022 and 2023.

Not only have the past couple of meetings seen a more positive response from the S&P 500 but the moves have been particularly pronounced in afternoon trading.  Below we show the intraday path of the S&P 500 on recent Fed days.  The past two meetings (November and December) have resulted in gains of over 1% by the end of the day.  However, in a stark difference to other recent meetings, the bulk of those gains have come from strong afternoon rallies in the wake of the decision. As shown by the red line below, the average if the prior ten meetings (those occurring from July 2022 through this past September) saw the S&P 500 trade higher throughout the session up until the final hour of trading when it gave up the ghost and closed at the lows of the day.

Looking back through all Fed days since 1994 when the FOMC began to announce its decisions on the same day of the meeting, there have been 14 times in which the S&P 500 was down by 0.5% or more by noon.  Below we have constructed an intraday composite of those days.  While the S&P has tended towards weakness throughout most of the session, it has experienced a rally, eating into those losses post-decision. That being said, the gains were not enough to erase all of the pre-announcement declines and the rally tended to be short-lived. Of those 14 days when the S&P 500 was down 0.5% or more by noon, it only closed higher on the day five times.

The FOMC kicks off its first monetary policy meeting of the year this morning with a decision tomorrow, but with universal agreement that there will be no change in rates, what Chair Powell says in his 2:30 PM ET press conference will be the primary focus of investors around the world.  Some would have you believe that the prospects for the market this year rest entirely on Powell’s words, so that if he’s dovish, there’s hope for the bulls, but if he comes out as hawkish, all hope will be lost.

A hawkish tone by the Fed Chair would likely be seen as a negative short-term development for the market, but at the same time, the relationship is not as binary as many seem to believe. The chart below compares the performance of the S&P 500 to the market pricing for the probability of a rate cut at the March meeting (based on Fed Fund Futures) since last October.  While equities bottomed and started to rally in late October, it wasn’t until late November that the odds for a rate cut in March started to increase and move out of their range (red-shaded area).  By that time the S&P 500 was nearly 10% above its low and 3.5% above the high end of its October range.  From late November through late December, both the S&P 500 and the odds of a rate cut rose in unison with each other, but pricing for a March rate cut peaked on 12/22.  On that day, the S&P 500 closed at 4,754.63, and since then, the odds of a March cut have been cut in half to 44.6%.  Over that same period, the S&P 500 is up over 3.5%. If the Fed was driving the bus, how come the market hasn’t been going along for the ride lately?

Today’s data slate was light with the only release of note being the Dallas Fed’s monthly manufacturing survey. The results were disappointing to say the least as the headline number came in at -27.4, more than twice as low as expectations of -11.8.  The huge miss relative to forecasts is not exactly new though.  Earlier this month, the Kansas City survey and New York Fed survey likewise came in well below estimates.

Using data from our Economic Indicator Database, below we show the average spread between the actual release value and economist forecast of each regional Fed manufacturing survey (Empire, Philadelphia, Richmond, Kansas City, and Dallas) since 2011. As shown, this January has seen outright massive misses.  Only two other months have seen readings disappoint to wider degrees: December 2018 and March 2020. In tonight’s Closer we will provide an updated look at our Five Fed Manufacturing Composite which creates a composite of each of these reports to gauge national manufacturing activity.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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On This Day in History:

Warren Buffett’s Investment Protégé Grew His Retirement Fund From $70,000 To $264 Million — An Account He Opened When He Earned Just $22,000 Per Year: ‘In A Perfect World, Nobody Would Know About This Account’ (Yahoo Finance)
When he was 22 years old in 1984, Ted Weschler was making $22,000 a year. He opened an IRA and grew it to $70,000 five years later. Weschler left his job as a junior financial analyst started a private equity firm, and then launched a hedge fund in 2000 that delivered a compounded annual return of 22% until 2011. He joined Berkshire in 2012, Throughout his career, and by 2021, that $70,000 exploded to $264 million. Aside from his stock picks, Weschler called on the value of investing in index funds over the long term, especially for average investors over the long term. [Link]

83% of Warren Buffett’s $365 Billion Portfolio Is Invested in Just 7 Stocks (Yahoo Finance)
Buffett has holdings in 50 stocks, give or take, but the vast majority of his equity portfolio can be boiled down to just seven. If you zoom in even further, almost half of the invested assets are in one name – Apple (AAPL). Toward the bottom of that top seven is Coca-Cola, Chevron, Occidental Petroleum, and Kraft Heinz, each reflecting Buffett’s preference for companies with predictable cash flows, strong market positions, or potential to benefit from economic trends. Check out the article for the top stocks! [Link]

AI & Technology

California could require car ‘governors’ that limit speeding to 10 mph over posted limits (San Francisco Chronicle)
California State Senator Scott Wiener has introduced a bill that would make California the first state to mandate “speed governors “in new vehicles.  Starting with the 2027 model year, these speed governors are a new technology that would restrict vehicles from exceeding 10 mph over posted speed limits, a measure intended to address the rising traffic fatalities in California and the Bay Area. The technology can use GPS or cameras to control speed based on where the car is, therefore knowing the posted speed limit and adjusting the max speed accordingly. [Link]

Netflix Co-CEO Calls Vision Pro ‘Subscale’ and Wonders if Anybody Would Actually Use It (Gizmodo)
Netflix has decided not to develop an app for Apple’s upcoming Vision Pro VR headset, priced at $3,500. Co-CEO Greg Peters expressed skepticism about the device’s relevance to their members, labeling it as “subscale.” This cautious approach reflects Netflix’s strategy to invest in technologies that yield significant returns. After all, the approach has historically been to build, not buy according to Netflix’s earnings call this past week. Others like Spotify and YouTube are also not planning Vision Pro-specific apps at launch. Despite Apple’s reported strong pre-order sales for the Vision Pro, Netflix and others are hesitant to commit resources to a platform that may not achieve widespread use. [Link]

Energy & EVs

US Wind Power Is Slowly Making a Comeback After Hitting Rock Bottom (Bloomberg)
After reaching a low point last year, the US onshore wind sector is experiencing a gradual revival, largely due to new tax incentives introduced by the Inflation Reduction Act (IRA) and increased demand. Despite challenges like inflation, higher borrowing costs, and supply chain disruptions, which limited installations to just 7 gigawatts in 2023, the sector is expected to see growth, with projections of installing 8.4 gigawatts in 2023 and nearly 20 gigawatts by 2030. [Link]

Lithium price plunges on slowing Chinese demand for electric vehicles (Financial Times)
Lithium miners are scaling back production and expansion plans due to a drop in lithium prices and slowing demand for electric vehicles, particularly in China. The price of lithium has fallen sharply, creating a surplus and challenging the profitability of mining companies. Major industry players like Pilbara Minerals and Albemarle are reducing costs and revising their strategies, while the Australian government is concerned about the impact on the local mining sector. Analysts suggest that China might use this downturn to increase its influence in the global lithium market, even as the market remains volatile and sensitive to demand and supply changes. [Link]

Political Turns

Orbán backs Sweden’s NATO bid in sudden U-turn (Politico)
Hungarian Prime Minister Viktor Orbán has now expressed support for Sweden’s bid to join NATO, promising that Hungary’s parliament will approve the application at its earliest opportunity. Hungary’s stance comes after Turkey ratified Sweden’s NATO membership, despite Hungary previously promising not to be the last to ratify Sweden’s bid. Orbán’s support was confirmed in a tweet and during a call with NATO Secretary-General Jens Stoltenberg, who welcomed Hungary’s position. The Hungarian parliament is expected to vote on this matter when it reconvenes in mid-February. [Link]

A new global gender divide is emerging (Financial Times)
As Gen Z ages into adulthood, genders are diverging on political and ideological beliefs as women lean more liberal and men lean more conservative. This gap, evident in countries worldwide, has widened rapidly in recent years. Key triggers like the #MeToo movement have intensified feminist values among young women, while young men’s views are drifting in the opposite direction. The role of technology and social media also plays a part, in influencing the beliefs and feeding content to users based on their interactions and subjects of interest. [Link]

Health & Wellness

Obesity Drugs Lead to Muscle Loss—Pharma Companies Want to Fix That (WSJ)
Weight-loss medications like Wegovy and Zepbound are gaining popularity due to their effectiveness and potential to reduce health risks. However, there are concerns that these medications may lead to muscle-mass loss, which could increase injury risk and slow down metabolism, potentially leading to regaining weight when patients go off the treatments. To counter this, companies like Eli Lilly are exploring combinations of GLP-1s with other medications to preserve muscle mass during weight loss. [Link]

Stanley Frenzy

Woman arrested after allegedly stealing $2,500 worth of Stanley cups (NPR)
Well, the Stanley hype has officially gone too far. A 23-year-old woman was arrested in California for stealing a trunk full of Stanley water bottles. The police responded to a shoplifting incident where the suspect reportedly filled her car with the stolen merchandise. Upon being apprehended, authorities found 65 Stanley products valued at around $2,500 in her vehicle. The social media trend for these water bottles has spiraled into overnight camping for limited edition models and sky-high resale prices online. We’re talking hundreds of dollars for each bottle! [Link]

Labor

Wayfair Layoffs Focused on Remote Workers (WSJ)
Recent layoffs at Wayfair disproportionately affected remote employees. The company has cut about 13% of its workforce after a pandemic boost turned into going “overboard in hiring.” Wayfair executives say that most people should be at the office working in person, on most days, following a broader trend in return-to-office culture. By the sounds of it, Wayfair is having some productivity issues, and the layoffs suggest that might be a result of remote work. [Link]

The Labour Market Effects of Venezuelan Refugee Crisis in the United States (Wiley Online Library)
With immigration being a huge area of debate in the US and for the upcoming 2024 election, this article analyzes the recent influx of Venezuelan refugees in the US, noting their high education level and preference for settling in Miami and Orlando, Florida. These choices are influenced more by proximity and climate than local labor market conditions. According to the study, there were no adverse effects on employment rates or wages of US citizens in these cities. [Link]

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