Jim Caron on the Market Selloff and the Fed's Historic Adjustment

SPEAKER_1 (0:03)

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Tracy Alloway (0:20)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:24)

And I'm Joe Weisenthal.

Tracy Alloway (0:25)

Joe, look at the screen. That's painful.

Joe Weisenthal (0:29)

So if you're just tuning in right now, we are recording this. It is 421 PM on 12-18-2024. So we just had a Fed decision. They cut rates, but they call it a hawkish cut because various reasons, which we'll get into. And stocks got clobbered. S&P ended down 2.95% again, that we're doing this. We're recording this after the bell on Wednesday.

Tracy Alloway (0:53)

Yeah, I guess maybe we fixed that breadth problem, a minimum. But yeah, everything is red. Bonds down, too, as well, which is kind of interesting to see them go in the same direction, all of which means we need to talk about markets. It's been a while since we've had like a chunky market discussion.

Joe Weisenthal (1:11)

It has been a while since we've just talked about markets. I mean, we sort of talked about them. We did an episode with the top strategist at Goldman recently. But what I would say the sort of defining aspect of markets right now, and you hinted at them, is how narrow this, you know, we've had extraordinary gains in equity markets in 2024, but the gains have become incredibly narrow. So basically, if you looked outside of anything that is an AI, chips, crypto and quantum computing, things have been sputtering for a while. A lot was really riding on a handful of sort of hot momentum names. You sort of wondered how long that could last. And again, if you look at the NASDAQ as of right now, up 29% on the year. Dow Jones, as we're talking about, 10 straight days, longest sellout since 1974

Tracy Alloway (1:57)

That's a crazy stat.

Joe Weisenthal (1:58)

I know it's a great stat, isn't it? Only up 12% for the year.

Tracy Alloway (2:01)

It's one of those days where we get to trot out all these superlatives because everything's moving all at once. But we need to talk about why this is happening, how long it might last, and what it means for next year, obviously, and we do have the perfect guests to be talking to. We are speaking with Jim Caron, the Chief Investment Officer of the Multi-Asset Portfolio Solutions Group at Morgan Stanley Investment Management. It's quite a title. Jim, welcome to the show.

Jim Caron (2:26)

Thank you. Thank you for having me.

Tracy Alloway (2:28)

So let's start with the basics. You know, Joe described it as a sort of hawkish cut. Was that your takeaway as well?

Jim Caron (2:34)

Well, yeah, I mean, I would say that it was even more than that. So, for example, we have to put this into context, right? So today, December, the Fed meeting, we have to go back to the September Fed meeting. That's when the Fed basically laid out the plan that they were on a mission to cut interest rates, that the terminal policy rate, that they were on a mission to get down towards a 3% Fed funds rate, possibly even lower than that.

Today, they reverse course to an extent that they actually, when we look at their dot plots, that they actually raise the dots by about 50 basis points across the board. Let me say that again. They raise the dots by 50 basis points across the board, and the dots are really just an estimation of what many of the Fed governors are thinking, the voting members on the Fed, are actually thinking about policy going into the future. So instead of having about four or five rate cuts in 2025, now it's closer to like two rate cuts in 2025 So they've cut that in half. This is probably, I've been doing this for 32 years, this is probably one of the sharpest reversals, or I should say adjustments, not a really a reversal, but an adjustment. The Fed's still cutting interest rates. So it's not a reversal to that extent. They're not going from cutting to hiking, but it is significant in that they've really made a big adjustment from just where they were three months ago. They typically are a little bit more longer term thinking, but I guess they're reacting to some of the inflation data, some of the equity market performance, and potentially even president-elect Donald Trump.

Joe Weisenthal (4:17)

It's a tricky moment. There was a good summary, I'm just gonna read it real quickly from the Bloomberg T-Live blog from Enda Curran. You know, he says, there are a few different needles in this press conference to thread, explaining why disinflation remains on track, but why they will slow their cuts, explaining why the job market is not a source of inflation, even though it's strong, explaining why they are thinking about Trump's new policies yet, even though they don't know the specifics. These are all tricky questions. It occurs to me, I was thinking about late 2018, when we had a very intense sell-off at the time, but it was kind of simple.