December 2024 marked the second-to-last time there was a dissent by an FOMC voting member. The dissent, at the time, was a sole vote by Jefferey Schmid against cutting rates. The last dissent was yesterday. While the Fed voted to maintain the Fed Funds rate at 4.25-4.50%, Michelle Bowman and Christopher Wallace cast dissenting votes in favor of reducing rates. Such was the first time two members dissented since 1993, as shown below. The two dissenting votes at yesterday’s meeting inform us that the tide is turning, and the rationales for not curing rates are fading.
The Fed made two changes to its statement from six weeks ago as follows:
- Replaced “economic activity has continued to expand at a solid pace” with “growth of economic activity moderated in the first half of the year“
- Removed “diminished” from “uncertainty about economic outlook has diminished but remains elevated“
In our opinion, the changes to the statement and the dissent votes point to slightly more dovish messaging by the Fed. Based on the market reaction, the markets do not agree with our take. In a section below, we share some quotes and commentary from Powell’s press conference.
What To Watch Today
Earnings
Economy
Market Trading Update
Yesterday, we touched on bonds and the dollar, which have both been building a base recently and could precede a reversal of recent weakness. Conversely, the stock market has had its 3rd best July since 1928.
“What a year to be an investor. In pretty much anything, at pretty much any time. Even during the dog days of summer. It’s unusual for stocks to record so many multi-year highs in July. With a week left and helped by six straight record closes, the S&P 500 has already carved out a place in history as one of the best Julys ever. Only two other years have witnessed so many highs during a traditionally slow month.” – Sentimentrader.com
The conclusion by Sentimentrader is that momentum has been momentous for some of the big, popular indices like the S&P 500 and Nasdaq Composite. As they note:
“That is usually a good sign, but a twist is when we’re seeing it. It has been relatively unusual to see such significant clusters of multi-year highs in these indices at this time of year. As we head into some of the lowest-volume trading of the year in August, it has usually proved to be a good time for traders to take profits and relax on the beach. None of this suggests a sell signal, especially beyond the next month or so. It does indicate that the upside may be limited as buyers relax after an impressive month.”
I know that has become a tiring message over the last month as the market keeps grinding higher. Our instinct as investors is that when the market defies what “should” happen, we tend to start convincing ourselves that it “can’t” or “won’t” happen. That is usually just about the time the market does something unexpected.
With markets turning in one of the best July performances ever and technical conditions overbought and extended, this setup bodes well for some caution in August and September, which tend to be weaker from a seasonality perspective.
Trade accordingly
When Powell Speaks, Investors Listen
The following bullet points are from Jerome Powell’s post-FOMC press conference:
- The economy is not acting like policy is restrictive; thus, according to Powell, current monetary policy seems appropriate. That said, he recognizes “downside risks to the labor market are certainly apparent.”
- Labor market growth is slow, but it’s tempered as the workforce shrinks due to immigration policies. Thus, Powell believes the labor market is “balanced.”
- In regards to a potential September rate cut: “We have made no decisions about the September meeting.”
- The dissent votes resulted in good discussions about monetary policy at the meeting.
- Powell thinks it’s too early to evaluate how tariffs will impact inflation. He believes the process will be slower than they initially thought. He still thinks it’s reasonable to assume these will be “one-time price effects.” “We will make sure this doesnโt turn into serious inflation.“
- Services inflation is offsetting goods inflation due to tariffs.
- Interestingly, he said they “could look through inflation by not hiking.” “A pretty reasonable base case is that this will be a one-time price increase.”
The Fed Funds futures market trimmed the odds of a September rate cut from 68% to 47%. In other words, the market thinks the statement and press conference were slightly hawkish.
The High Beta Meltup: Echoes of 1999
In our recent article, โThe Magnificent Seven Are Mediocre,โ we pondered whether the stock market is entering a melt-up phase, where investors driven by extreme speculative behavior and hopes for exponential returns favor volatile stocks with high betas.
To be clear, we do not know whether we are in a melt-up phase. The market could simply be showing a short-term appetite for risk. Importantly, even if this is a melt-up phase, we donโt know whether we are close to the end or if it still has plenty of gains ahead.
What we do know is that, starting from the April lows, the marketโs attitude toward riskier, more speculative activities has become much more intense. We also know this phase will eventually end. It could end with a broad market meltdown and a high beta bust, similar to the dot-com era. Alternatively, the broader stock indexes might hold up reasonably well as the lower beta, more value-oriented stocks offset the losses from the more speculative assets.
To help us better assess the situation, we review the 1999 dot-com melt-up for clues, as there are some striking similarities between then and today worth studying.
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