Dwyer states that the Fed's announcements reinforced the central bank's intention to cut rates. However, "the problem" is that the emerging inflation data "is fully incomplete." Dwyer adds that the private credit market "neutralized the impact" of the higher interest rate environment, making it "tough" for markets to obtain reliable data that supports an easing cycle.
Dwyer highlights that "the key" to the economy's resilience lies in the labor market. He suggests that as long as employment remains robust, "the Fed may not even cut rates at all."
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Editor's note: This article was written by Angel Smith
JULIE HYMAN: Stocks rising today after the Federal Reserve yesterday signaled it will delay, but not slow interest rate cuts. For more on how investors should be playing the higher for longer Fed, let's welcome in Tony Dwyer, the Chief Market Strategist for Canaccord Genuity.
Tony, what was your read on the Fed when all was said and done. And does it change anything in terms of how you're viewing strategy?
TONY DWYER: So the late Marty Zweig had two phrases, especially for those that are new to investing. Don't fight the Fed and don't fight the tape. And what they've been telling us since the dovish pivot is that they're going to be cutting rates, not raising rates.
Yesterday, he really reinforced that when he said that word a cycle high in rates. And we're still looking to cut three times this year. Now, as borderline between 2 and 3, so you could have a nuance there, but ultimately, the Fed is in easing mode. And that's benefiting the tape.
JOSH LIPTON: Tony, they also lifted their projections for economic growth this year. Does that kind of dovetail with what you're seeing?
JULIE HYMAN: It's kind of interesting. They increased their estimate for growth. They increase their estimate for inflation, but they didn't decrease their estimate for how many cuts they're going to have or the fact that they're going to stay cutting versus higher for longer or even raising rates.
The problem that I have, Josh, is the data that's coming in is wholly incomplete. One of the things, if you remember back in January, as you can see on that chart, the Fed has raised rates in a historic way. It's the fastest rate hike cycle in history.
So you would imagine that it would have had a bigger economic impact. But there's been a source of capital that didn't exist before in the private credit market that has replaced bank lending, and other area, capital markets activity. Those areas kind of held the private credit market kept things afloat last year.
And it kind of neutralized the impact of an inverted yield curve and higher interest rate environment on bank lending. And we're trying to figure out, the markets trying to figure out where we stand in that. At this point, it's really tough to get good data.
JULIE HYMAN: Well, and it also sounds like if what you're saying, if indeed private credit was really the one of the main reasons here, does that permanently or at least for as long as we can see decrease the effectiveness of interest rates as a tool, either tightening or loosening.
TONY DWYER: As long as employment stays fine that, that's the key here, Julie. As long as employment stays fine, because it's a service-based economy, 67% of the US economy in consumption is service-based. So as long as everyone's working, you have money and increase money to spend.
So here's the rub. In January, remember how many people like me came on shows like yours and said, well, there's 335,000 jobs. The Fed may not even cut rates this year at all.
And then all of a sudden, fast forward to this most recent report, the prior two months were revised downward by almost 175,000 jobs. So that negated that real upside surprise. So the problem is that the data coming into the Fed and us is very incomplete.
Companies aren't responding in time to the Bureau of Labor statistics survey to actually get good reads. So the Fed has had one time in their history where they've got it right. 1995 after a tightening cycle, a sharp tightening cycle.
They got it right. It was a soft landing. And the market stayed strong. That when it was good data coming in. They're having a challenging time getting good data now.
And so, Tony, so bottom line, though, listen, we had a big update yesterday. Green across my screen here again today. I'm just curious, where do you think we head from here? How does this market play out here in the next 6 to 12 months?
TONY DWYER: Well, so as I said, don't fight the Fed. Well, don't fight the tape earlier this year. After that Fed pivot, the December dovish pivot as it's called, there was a breath thrust that I can't-- no matter how you tear it apart, it was a good move in the market.
That each time his suggested 9 to 12 months out, you're up almost literally every time. That doesn't mean it's going to happen. But that's what's happened when you have these kind of breath thrusts.
So there can be a lot of churn in the middle of it. But ultimately, by the end of the year, it should be a pretty good year. You don't want to fight-- When the folks printing the money are telling you they're game plan, you tend to listen, especially if the tape is agreeing.
JULIE HYMAN: And now instead of following the Mag Seven, or large cap tech, or whatever you want to call it, do you want to follow that breath? In other words, as I noted earlier, you got the S&P equal weight beating the broader market today. You have the Russell really beating the market today. Is that where you want to be?
TONY DWYER: So to be clear on my prior comment, I don't think you want to fight the tape. But you don't necessarily need to chase it. Because if you're looking at the S&P 500, you're up on really 7 to 10 stocks. Not just in tech, it's been in multiple industries. But it's been those mega-cap stocks.
So what makes you want to buy the average stock or have the troops catch up with the generals? And Julie, as you know, for me, it always comes down to earnings. Literally last year according to my earnings, wizard@lsg.tjdillon, S&P operating profits would have been negative last year if it weren't for the Mag Seven.
That's true again this quarter. So what I think we're starting to sniff out in the bottoming of the equal weight relative to the S&P or the Russell 2000 relative to the S&P, it's starting to sniff out that changes later in the year, where the earnings growth isn't dominated just by seven stocks. It's more evenly distributed. So if I have a Fed that's easing interest rate policy, if I have a breadth thrust where investors are kind of a little bit too much right now chasing the gains in the market, but you have earnings justification for a broadening.
Not necessarily another 10% S&P move, but a broadening where there's more stocks participating with the move. I think you have a good setup for that as we go into the year end.
JOSH LIPTON: Tony, we always love having you on the show. Thanks so much for joining us today.
