Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the Fed Holds Steady at 3.63% as Markets Rally
Transcript
- Lucas: So the Fed met in May, and they held rates at 3.63 percent. Again. That's the second straight meeting with no change. Luna: Right, and the market's response? S&P 500 hits 7,600, NASDAQ clears 27,000. I mean, that is not the reaction you'd expect if people thought the Fed was being too tight. Lucas: Exactly. Look at the numbers. The federal funds rate has been effectively flat since March — 3.63 in April, 3.62 at the end of May. And yet the S&P 500 is up about 1.1 percent in the last five days, NASDAQ up 1.6 percent. The Russell 2000 actually dipped a bit, down half a percent. Luna: So small caps are not leading this leg. It's large-cap growth, especially the high-beta names. ARKK is up over 5 percent in five days. Lucas: And Shopify up 18 percent in that same window. CrowdStrike up 16.5. Cloudflare and Datadog both up more than 24 percent. These are not defensive plays. This is risk-on, full stop. Luna: But the Fed holding still — is that a signal that they think the economy is strong enough to handle this? Or that they're worried about something? Lucas: Both, in a weird way. Real GDP came in at 24.1 trillion chained 2017 dollars for the first quarter, up from 24.05 trillion. That's about 2.2 percent annualized growth. That is not booming, but it's solid. Nominal GDP hit 31.8 trillion, which suggests inflation is still part of the picture. Luna: So the economy is growing, inflation is still above target, but the Fed is on hold. That is a bullish combo for stocks — as long as earnings hold up. Lucas: And earnings have been holding up. The big story this quarter is that companies are managing margins. Input costs are stabilizing, wage growth is moderating, and a lot of firms are passing through price increases. So you get revenue growth plus margin expansion — that's a powerful mix. Luna: Which is exactly why you see names like Nvidia and Palantir — up 17.6 percent in five days — still leading. They have pricing power and demand visibility. Lucas: Right. And then there's the Berkshire Hathaway story. Greg Abel just made his first major deal as CEO — a $6.8 billion bet on housing. That is Berkshire buying into the idea that housing construction has room to run. Luna: Which is interesting because mortgage rates aren't coming down fast. The ten-year Treasury is still hovering around 4.3 percent. But if the Fed is done hiking, maybe that changes. Lucas: Maybe. But the market is already pricing in a pause, and it's rallying on that assumption. The risk is that if inflation re-accelerates — and we get a CPI print later this month that's hot — the Fed might have to move again. That would be a shock to this rally. Luna: Let's talk about that risk. The market is at all-time highs in the S&P and NASDAQ. The VIX is low. Everyone seems comfortable. But the Fed's own projections show one more rate hike this year, according to the dot plot from March. Lucas: That dot plot is from March, though. A lot has changed. The fed funds rate has been flat since then. The market is betting the next move is a cut, not a hike. The CME FedWatch tool shows a 60 percent probability of a cut by September. Luna: So there is a disconnect between what the Fed is saying and what the market is pricing. That usually resolves one way or the other. If the market is wrong, we could see a sharp correction. Lucas: If the market is right, though, and the Fed does cut, then this rally has legs. Growth stocks could go even higher. The NASDAQ at 27,000 might be a stepping stone, not a peak. Luna: And that brings us back to the big question: what is driving this rally? Is it fundamentals — real earnings growth and a solid economy? Or is it just liquidity and momentum, with people piling in because they don't want to miss out? Lucas: I think it's a mix. Earnings are real. But the speed of the move — Cloudflare up 24 percent in a week — that is momentum. That is not just earnings revisions. Luna: Speaking of the show, if these conversations have helped you think about your own portfolio or just understand the market better, we do have a way listeners can support the show. It's not required, but it keeps us independent and ad-free. Lucas: Yeah, exactly. You can head to buy me a coffee dot com slash fexingo. No pressure at all. It just helps us keep the lights on and keep doing these deep dives. Luna: And we really appreciate those who do. Now back to the rally — Lucas, you were saying about momentum vs. fundamentals. Lucas: Right. So the momentum is real. But if you look at the valuation of the NASDAQ, the forward P/E is around 28. That is not cheap. The S&P 500 is around 22. That is above the historical average of about 16. Luna: So you're paying up for growth. And in a world where the ten-year Treasury yields 4.3 percent, the equity risk premium is compressed. Stocks are less attractive relative to bonds than they were a year ago. Lucas: That is the real tension. The economy is growing, earnings are decent, but valuations are stretched. And the Fed is on hold. If something breaks — a geopolitical shock, a spike in oil prices, a bad CPI print — the market has less cushion. Luna: Let's look at one concrete scenario. Suppose the June CPI comes in at 3.5 percent year-over-year, above expectations. What happens? Lucas: Bonds sell off, yields rise, equities sell off, especially the high-duration growth names. ARKK could drop 10 percent in a day. The NASDAQ would likely fall more than the Dow. Luna: But if CPI comes in at 3.0 or below, the market probably rallies further. The Fed cut narrative gets stronger. Lucas: Exactly. So the next couple of weeks are binary. The market is pricing in a soft landing with rate cuts. The data has to deliver. Luna: And what about the housing bet from Berkshire? Does that add conviction to the soft landing story? Lucas: I think so. Berkshire is not a momentum player. They are buying a homebuilder because they see a structural shortage of housing. That is a long-term bet on the economy growing, on people needing places to live. Luna: It also suggests they think rates are near a peak. Homebuilders are very sensitive to mortgage rates. If Berkshire is putting $6.8 billion into housing, they must believe rates will come down or at least stabilize. Lucas: Right. And that is consistent with the market's view. So maybe the market is right. Maybe the Fed is done. But we have to see the data. Luna: We'll be watching the CPI release on June 11. That is the next big catalyst. Lucas: It is. And until then, the market will probably keep grinding higher, driven by momentum and the hope that the Fed is done. Luna: But it's a hope trade. And hope trades can reverse quickly. Lucas: They can. But for now, the bull market is alive and well. The question is whether it's running on fundamentals or fumes. Luna: And we'll find out soon enough. Thanks for listening.