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  • Scott Poore, AIF, AWMA, APMA

Who's The Real Genius?

Is Powell a genius or just lucky? We'll quickly find out in 2024 as there is a battle waging between the Fed and the market in terms of when rate cuts will be needed.

The inspiration for this week's musings is the 1985 film, "Real Genius." The movie was not exactly a box office smash, but is another movie that has fallen into "cult" status among fans. Here's some trivia about the film:

  • Had this film not been released in August of 1985, it probably would have fared better at the box office. On a budget of $8 million, it only grossed $12.9 million. It was up against the likes of "Weird Science," "Teen Wolf," "Better Off Dead," "Summer Rental," and "Fright Night."

  • The film was inspired by actual events at Cal Tech in the 1970s. In the movie, Lazlo Hollyfeld sends in a large number of entries into the Frito-Lay sweepstakes contest. Caltech students Steve Klein, Dave Novikoff, & Barry Megdal used a similar strategy in 1974 to win the McDonald's sweepstakes. They won a station wagon, $3,000 in cash, and $1,500 in McDonald's gift certificates.

  • The stunts and pranks in the film are also based on actual college antics at MIT, Caltech, and England's Cambridge University. For example, the scene where Kent's car is shown still running inside his dorm room is based on an actual incident.

  • The famous popcorn scene at the end of the movie was difficult to shoot and "ate up" most of the film's budget. The crew popped the popcorn for three months to create enough to fill the house during the scene. They treated it with flame retardant so it would not combust during filming, but had to keep birds away from the popcorn due to the harmful substance. This was used as the inspiration for a "MythBusters" show in 2009, which obviously disproved the ability to pop corn using a laser.

Here's what we've seen so far this week...

Who's The Real Genius? The Fed met this week for the first time in 2024 and the fireworks did not disappoint. The Fed, like so many other institutions, has lost sight of the totality of whom they represent. It reminds me of the scene where Professor Hathaway, the antihero of "Real Genius," comes home to find construction workers putting the finishing touches on his new home. He looks at them and barks, "What are you looking at? You're laborers; you should be laboring. That's what you get for not having an education."

The Fed doesn't mind playing games with the market and people's next eggs. A little over one month ago, Powell hinted at rate cuts by stating that the economy was normalizing and that dialing back policy restraint was now a discussion topic for the Fed. And yet, this week the Chairman's tone was quite different - hawkish, even. He basically took a rate cut in March off the table, which sent markets reeling as the S&P 500 Index dropped 1.6% on Wednesday following the Chairman's comments.

In fact, the futures on a Fed Rate Cut in March have plummeted from 70% just one month ago to only 19% today. While the market clearly did not like the news, earnings releases this week seem to have changed investors' minds.

Some big tech names reported Q4 earnings this week and, overall, didn't disappoint. Tuesday, Google and Microsoft got the ball rolling as both companies beat on earnings and revenues. While revenue and guidance weren't perfect, the market isn't exactly throwing in the towel on those two stocks. Then yesterday, Apple, Amazon, and Meta joined the earnings party as all three companies also beat on earnings and revenue expectations. So far, the market is largely embracing those numbers. In fact, nearly half the S&P 500 companies have reported Q4 earnings and the growth is +16% on a year-over-year basis - the 4th straight quarter of year-over-year positive earnings growth. At this point, maybe the market is a better judge of valuations and economics as the S&P 500 Index is on track for another positive week despite Wednesday's Fed-induced debacle.

Let's Take A Step Back. An entertaining scene in "Real Genius" involved the young genius Mitch who is clearly frustrated after not getting the laser to achieve their benchmark. Chris, the senior who jokes about everything puts his arm around Mitch and says, "Okay Mitch, I'm gonna make it up to you. Let's just pause, put that down. Let's just take a step back. No, I was wrong, I'm sorry, take a step forward. Now, take a step back. Step forward. Back. And then we're cha-cha-ing!"

As investors, sometimes you have to take a step back, even laughing at the noise, and keep your eye on your goals. When we look at previous periods in the market, we don't see the current economic picture. That doesn't mean the situation will remain constant, but the warning signals haven't reared their ugly heads yet (for you real geniuses out there, yes, I used a double-negative). For example, if we start with market volatility, the warning signs aren't yet visible. In 2000, the S&P 500 peaked on March 27th, and at that time, the VIX had risen to 27.04. It wasn't done, by any stretch, as the next few trading days saw the VIX rise 23%. In 2007, the market peaked on October 9th, and the VIX was trading at 16.12. The next several trading days during October, 2007 saw the VIX rise another 30%. While the COVID crash was different, the explosion in the VIX saw it trade from 14.83 at the market peak on February 19, 2020 to 40.1 in just two weeks (an increase of 180%)! Contrast that to today, and the VIX has been in a downward trajectory since October of 2022 and is trading around 14 - well below the historical range of 19.6.

Last week we highlighted the higher-than-expected GDP number. This week, the Atlanta Fed upped their expectation for 1st quarter GDP from 3.0% to 4.2%. Much of that has to do with the consumer as the Fed's expectation for consumer spending in the first quarter rose from +2.4% to +3.3%. Some of the economic data that came out this week seems to justify that higher expectation. The Consumer Board's measure of Consumer Confidence cam in at 114.8, which was a considerable increase from the previous month and the highest reading since December, 2021. Similarly, the University of Michigan's Consumer Sentiment measure came in at 79, which was much higher than the previous month's measure of 69.7 and the highest level since July of 2021.

The Jobs Report seemed to disappoint the market this morning initially, as the strong number might validate the Fed not cutting rates in March, as Powell advertised. Nonfarm Payrolls for January showed 353,000 jobs added. While the numbers have shown a penchant for being revised lower in 2023, this was the first time that we saw the previous month's number (+216,000 in Dec) revised higher by 117,000. In fact, this is the first time in 5 months that the previous jobs number was revised higher.

On top of that, the Challenger Job Cuts number was negative on a year-over-year basis for the 3rd consecutive month and the JOLTs Job Openings moved back above 9 million and last month's reading was also revised higher. Despite some headline job cuts announced the last couple of weeks, with the JOLTs number still so high, there are plenty of jobs available at the moment. In addition, US Household Debt Service Ratio (debt payments as a percent of disposable income) remains low, especially when compared to other pre-recessionary periods. Like the song suggests at the end of "Real Genius," Mr. Powell just wants to rule the world, meaning more back-and-forth comments are likely until we see the first rate cut by the Fed.

Here's the final scene of the movie featuring the infamous popcorn...



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