Fed Changed Directions. Will History Repeat?
1.) FED – Ok, Fed day is gone. Kinda. Centralized market planning isn’t ever really “gone”. But here we are…the Fed raised rates. It doesn’t matter what I think about this…even though I think it's a policy error. What matters is how markets respond. So far this morning, stock futures are responding positively after reacting negatively yesterday. Of course you never know exactly how a market will react to a large macro factor like this, but we do have history…precedent. It's almost laughable about the timing too. Remember what happened the last time the Fed changed directions? In September 2024, the Federal Reserve started cutting interest rates, which is almost exactly when interest rates stopped going down. Stranger than fiction, right? They cut rates, and rates stopped falling. Now the Fed raised rates. I guess it would be pretty funny if rates now stopped going up. The Fed only controls the shortest of rates…Fed Funds, which dictates savings account rates, prime lending rate, etc. The 10YR and 30YR yields are much more closely connected to the world of long-term borrowing and mortgage rates. These rates are determined by the bond market itself. So, rates stopped going down the last time the Fed changed directions and cut. Now they changed directions and raised. So take a look at where the 10-year Treasury yield is today (chart below). Here we are almost 20 years later, and the 10-year yield is right back at the same levels they were in 2007. Seems like the perfect spot for these rates to stop going up! Of course I have no idea if they will or won’t. There are other factors at play. But you have to admit, the inverse similarities are pretty stark here. It’s just important to remember that markets look forward. By the time the Fed actually does something, the bond market has usually been moving in that direction long before the announcement. That’s clearly been true this time as well. So far this morning the 10YR and 30 YR yields are already responding…down about -1% to -1.5%. We’ll have to wait a while to see if this was the actual turning point.
2.) GROWTH – We track growth via GDP data. But not just the number. We track whether it is accelerating or decelerating. So far, we continue to see accelerations. The Atlanta Fed's GDPNow model shows Q3 GDP growth tracking toward an annualized 5.1%. If that comes to fruition, it would be the best quarter since Q4 2021.
3.) DIVIDENDS – What about companies sending money back to shareholders…dividends? Growth investors probably say…”who cares!”. But it might matter more than you think. Although firms are raising capital expenditures these past few quarters, dividends are actually rising faster. That may be significant. Let’s go back to the storied late-90s (before the dot-com bust), which is viewed as the “golden period”. Fed Chair Warsh likes to believe we are in that zone once again! Back then, dividends were about 20% of capital expenditures. Today, it's close to 50%. Maybe there's something to that. Maybe not. Regardless, it certainly is not a bad data point when considering market health. Companies would not be increasing dividends if they felt a slowdown was coming. If they thought that was happening, they’d be finding ways to keep cash, not send it back to shareholders.
