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Why This Fed Meeting May be the Most Important One Yet

The Daniela Cambone Show Jan 29, 2024

“It really looks like we can get a soft landing,” says Chris Versace, Chief Investment Officer of Tematica Research. In an interview with Daniela Cambone, Versace shares his views on the S&P, U.S. dollar, gold, and the upcoming U.S. presidential election. He attributes the mounting credit card debt and records of student loan payments as factors contributing to a slower economy. “Do we get to a recession? Hard to say. It could sure feel like a recession for a lot of people,” says Versace. Additionally, he remains positive about the U.S. dollar and predicts continued strengthening. Given the geopolitical uncertainties we’re facing now, Versace points out that gold will consolidate. “I think it’s gonna be a good year for gold. I think we could see another mid, maybe upper single-digit increase,” he concludes.

CHAPTERS:

00:00 Jan. Fed meeting
3:30 S&P
5:55 Disconnect between S&P and real economy
8:01 Recession
9:50 U.S. dollar
10:32 Bitcoin
11:36 Gold
12:43 Davos

TRANSCRIPT FROM VIDEO:

00:05

Hi, this is Daniela Cambone and welcome back to the Daniela Cambone show. Well, it looks like the Federal Reserve will wait until the second quarter before cutting interest rates. This is according to a majority of economists polled by Reuters with June seen more likely than May and less easing forecast this year than markets now expect. Well, we’re going to get Chris Versace’s take on this. He is the Chief Investment Officer and thematic strategist over at Thematica Research. Chris Versace, always good to be with you.

 

00:35

Always good to be here. So I want to get your take on the Fed. I want to get your take on the S&P and so much more. So let’s start with our friends over at the central bank because we’re speaking ahead of the much anticipated January meeting. What do you think they’re going to do here? I read what the poll says, but what do you think? What’s your gut take? So I’ve been sitting back and watching the market continue to fixate on five or six rate cuts.

 

01:03

in 2024 with the CME FedWatch tool, the tool that we all look at, still indicating that there’s a good chance they’re gonna get started in March. And I’ve got to be honest with you, I don’t really see it. When we take a look at the December inflation data, it was actually up on a year over year basis compared to what we saw in November. So arguably moving the wrong way, but we’ve also seen some other tailwinds emerge that kind of raise some questions about how fast

 

01:32

we’re gonna close that last percentage point from around 3% or a little over 3%, depending on the metric you’re using to the Fed’s 2% target. And here’s the thing, we know that the last mile, so to speak, is always the slowest, right? These incremental gains. And we’re kicking off the December quarter earnings season in earnest, right? We’re starting to hear companies take down guidance, but what I’m listening for is further progress.

 

02:00

on what they’re seeing in their input costs. And it hasn’t really started to show and paint a picture of robust gains. If anything, we’re hearing more companies ranging from Tesla to Tractor Supply and others talk more about the disruptions that what’s going on in the Red Sea is going to have on their business, not only in terms of longer delivery times for parts and materials, but higher shipping costs, higher insurance costs.

 

02:29

And typically when we see these types of supply chain disruptions, what do companies do? They start paying premiums to get the products and parts that they need. I think it’s another headwind. So my thinking to come full circle back to your question is I think Atlanta Fed President Rafael Bostic is probably closer to right than not. Two maybe three rate cuts in the back half of the year.

 

02:55

most likely starting either June, maybe July. But a lot of that’s gonna depend on the inflation data we get, and candidly too, the pace of the economy, which 2% GDP growth, that’s not really slowing down significantly. It can give the Fed some time. And that 2% GDP growth rate is about the average for 2024. Goldman Sachs just came out and lifted its forecast to 2.1% GDP for 2024. So…

 

03:24

A lot of reasons to think the Fed can take a very measured approach here. Right. So very good points, Chris. And you hit on one. Let’s talk about what this can do to the S&P because as we’re speaking right now, S&P in a bull market since it closed that it’s low in October 2022 keeps making record highs here, new and new highs. Once the Fed, let’s play it out, does start cutting, what happens here?

 

03:51

So that’s a great point, right? Now it all hinges on when the Fed starts cutting, but what I’m saying here is the expectation for that is gotta get pushed back, right? We need to move the field goal post from March back, perhaps about as much as a quarter, right? That means that rates are going to be, at least in the short term, a little higher than previously expected, and most likely for all of 2024 as well. So companies are gonna have to think about that.

 

04:19

But as you talk about the S&P 500 and earnings expectations, boy, there’s a lot going on. We know that the economy is slowing compared to that September quarter GDP print 4.9%. Odds are interest rates are gonna be higher for longer. We’ve got this disruption in the Red Sea. There’s some other geopolitical conflicts going on out there. And even though the pace of inflation is slowing,

 

04:46

it’s still inflation, right? We haven’t seen deflation. So there’s a lot of these headwinds to earnings expectations, which in my view are still pretty robust. Consensus, EPS expectations for the S&P 500 for 2024. Wow, I gotta tell you Danielle, that is a mouthful to say, but. But what’s realistic for you, yeah. But they’re still up around 11% year over year, which is.

 

05:13

You know, if you think of the environment that we had over the last two years where the growth, particularly 2023 over 2022 for S&P 500 earnings was relatively flat, if not down slightly, the question you have to ask yourself is, good God, man, what is going to get that EPS growth up double digits? And, you know, as we tend to see, the forecast is really skewed towards the back half of the year.

 

05:39

And if you take a more rational approach, you use more with the average second half EPS growth as compared to the first half, you get EPS growth for all of 2024. That’s more in that five, six, seven percent range. Can you help us understand a little bit about this disconnect that the folks at home write into me about, Chris? Because they’re saying, okay, we’re seeing the S&P record highs. But like you said,

 

06:05

You know, they’re still feeling the inflation crunch. They’re seeing the layoffs, Macy’s, you know, wayfair, whatnot. They’re seeing the economy, not what the S&P is showing. So why this disconnect? Well, I think it really gets down to how the S&P 500 is constructed. And you have to remember too, that it’s a market cap driven product. Okay. So if you…

 

06:30

think about that and you think of the Magnificent 7 or more recently the sexy six, I guess you could call it, because we wanna exclude Tesla, right? Or some other S word that you might wanna use, something six, sensational six, let’s call it. What did we see over the last 10 days that have really pushed the AI and chip sector higher? It was comments out of Taiwan Semiconductor that we see top line revenue growth of 20%.

 

07:00

Mark Zuckerberg posted on Instagram that they are buying the heck out of Nvidia GPUs for AI and data center. And then a company that very few people heard about, Super Micro Computer, turn around and upsize their outlook, which confirmed all of that. So we’ve seen this real push higher in this handful of stocks. And that’s been the driving force behind the S&P 500. Again, the market cap version of the index.

 

07:29

When you step back and you look at the equal weight, right? Where it’s not market cap weighted, every position is the same. The S&P 500 is, as I last checked, flat to almost down so far in 2024, not making new highs and certainly not up in positive territory. And it’s that disconnect, pretty much the same thing that we saw from around February, March of 2023 through the first. Right.

 

07:55

the first nine months of the year, where really a handful of stocks were driving the market higher. I was gonna say we could call it the spicy six, but- There you go. But let’s talk the R word now, recession, because there’s still so much debate of, will the Fed get that soft landing or not, or the recession has already begun, we’re actually in one. Where does Chris Versace fall in that camp?

 

08:19

So again, this is always an evolving thought because we get more data. So as we sit here today, it really looks like that we can get a soft landing. You know, again, GDP forecasts are GDP forecast, but you know, when you kind of peel back the manufacturing economy, the services economy, and we get a lot of data about this from not only ISM, but S&P Global, the service economy continues to carry us.

 

08:46

The manufacturing economy looks to be slowing. Perhaps that is going to be a bigger drag on the overall economy, we’ll have to see. But to me, it’s going to come down to, if you think about the services economy, the consumer, which is directly and directly two-thirds of the economy. We know that they have taken on record levels of credit card debt. Interest rates are higher, so they’re spending more money servicing that debt. We know that…

 

09:16

A swath of consumers are dealing with student loan payments again. That has me a little concerned about the middle of the year. At the same time, to be candid though, we are seeing the return of real wage growth. I’m kind of watching these things. If one tips over, it could signal a more pronounced slowdown in the economy than we’re thinking. Do we get to a recession? Hard to say.

 

09:45

it could sure feel like a recession for a lot of people. Let’s talk the US dollar. What is it signaling to you right now? Well, you know, again, as we’re kind of sitting here, my expectation is that the dollar will continue to strengthen. I say that because I have to tie back to my comments about what the Fed are. The Fed’s gonna do less than expected. The dollar will therefore remain stronger. And this kind of gets into the question then of what are other central bankers going to do

 

10:13

on interest rate cuts. Namely, let’s just say the ECB because there’s been a lot of expectation, but I believe at Davos, Christine Lagarde was saying not till sometime middle of the year, maybe second half, kind of reiterating the Fed playbook. I want to talk Bitcoin now and get your thoughts on all the buzz regarding the Bitcoin ETF, but as we’re talking right now, Bitcoin price under pressure. So Chris, is this just a buy on rumor, sell on news?

 

10:43

situation here for the cryptocurrency. You know, the eventual approval and release into the wild, if you will, of Bitcoin ETFs was something that has been going on for a long, long time. So I do have to kind of think it is a little bit of a big euphoric release. Wow, look at what happened. And now things are starting to settle back down. And, you know, we’ve seen this on any number of times with, you know, similar situations. And by that, I mean…

 

11:11

buy the rumor, sell the news. The hype is so much that it simply can’t, it cannot live up to the expectation. But for folks that wanna be long-term buyers, now is your chance to figure things, pick your spots and slowly weight in, whether it’s Bitcoin or individual stocks, I would say. That’s how you have to think about these buy the rumor, sell the news events. We spoke US dollar Bitcoin. Let’s conclude that trilogy with your thoughts on gold.

 

11:38

Holding its own here, I mean above 2,000 an ounce, despite, like you said, the strength of the US dollar and the strength of the S&P, your take on gold. I think it’s gonna be a good year for gold. I think we could see another mid, maybe upper single digit increase. I say this because I struggle to think when in the last 20 years, we’ve seen such geopolitical tension out there like we’re seeing today. The other wild card.

 

12:07

that we have to watch out for too is what happens with China and Taiwan. And that’s a wild card, not only for gold, that would be very positive for gold, but it’s also a wild card that we have to consider for the chip industry, but also the larger economy. You know, we’re talking these days about the Red Sea and how about 12 percent of global freight kind of passes through there. That number is a lot bigger when it comes to the Sea of Japan. Sorry, the China Sea.

 

12:36

I believe it’s around somewhere between 25 and 30 percent. That would be a very big deal. Chris, just to wrap here, you mentioned Davos, so let’s talk about the attendee whose comments drew the most notice of JP Morgan Chase’s CEO, Jamie Dimon, who went on the record with this. He said, quote, I wish the Democrats would think a little more carefully when they talk about MAGA. This is what he told CNBC’s Squawk Box. As he praised the many things he said, Trump got kinda right. As Trump…

 

13:04

looks to secure the Republican nomination for a third time. Your take on Wall Street, Trump and Diamond’s comments. Well, first things first, whenever Jamie Diamond talks, you really have to pay attention. The guy is wicked smart. He’s been around the block and he’s done a lot of great things over at JP Morgan. Second thing I will say, it actually references a tweet that I saw, or I’m sorry, an ex that I saw recently. And it said this, and it was very sobering.

 

13:34

Do you realize that President Clinton is younger than both of the would-be candidates for the 2024 election and he’s been out of office for 20 years? Now, what does that tell you? So what I think is gonna happen from the Wall Street perspective, Wall Street does not like uncertainty. It also doesn’t like excessive spending, regulation, those sorts of things. So could we see it get behind Trump? It’s certainly possible.

 

14:01

It could mean perhaps tax cuts. It could mean less regulation. But there is also the wild card that Trump just presents in and of himself. And I think that’s going to have folks kind of bracing for what could happen, that continuing air of underlying uncertainty. So I have to say, just to wrap it, that I am amazed.

 

14:28

that we have two very old white guys running for president. And I kind of wish, I think a lot of folks wish that there was another natural alternative. Ultimately though, Danielle, what’s gonna happen is it’s gonna come down to what the policies are, what the agendas are. And I think we’re gonna learn a lot more about that over the next couple of months, leaning into the final push.

 

14:54

for the 2024 presidential election. I like how you said natural alternative. It could be a black swan event. I, you know, I mean, here’s the thing, right? So we see what is happening on the GOP side. We see the polling numbers and you just have to wonder, like at some point, does the DNC just, you know, say to Joe Biden, look Joe, we love you, you know, did a heck of a job in a very trying time,

 

15:25

And I think that’s what folks are kind of waiting for. And if you think about Diamond’s comments, really, he’s indicating, hey, Democrats, wake up. Don’t alienate folks because you need votes to win. Yep, yep. I have to absolutely agree with you on reading between the lines of Diamond’s comments. Chris Versace, I love catching up with you. Come back soon. Would love to. Thematica Research, where can people read more?

 

15:51

of your stuff. I would say the two best places, actually three places. You can always see me at Twitter, Real Chris Versace. The other place is go to aap.thestreet.com. That’s where I’m there every day running the streets portfolio. If you want some stuff on the thematic side, check out tematica, Real Chris Versace.

 

16:14

Thank you and thank you all for watching. We’ll have more great content coming your way, so be sure to stay tuned to the Daniela Cambone show and don’t forget to sign up at danielacambone.com so you can stay on top of it all. That’s it for me, thanks for watching.

 

SOURCES:

https://twitter.com/ChrisJVersace

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Sources & References In This Article

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