For those of you who would prefer to listen:
It wasn’t Nvidia that saved the rally in November. It was the Fed. After what was looking like a remote chance of a December rate cut, with a mere 30% probability 4 weeks ago, the central bank switched gears and lowered borrowing costs again this week. There has been much debate about this within the Fed’s Open Market Committee. They’re the ones who vote. There are twelve of them. The Fed Chair has been cautious and reluctant to cut more, as prices remain elevated. But the rate of inflation has definitely declined. It’s evident in Energy prices, Dairy prices, Lumber and other agricultural crops. They’ve come down. All other prices are just going up at a slower rate than the past couple of years. At least for now.
The Fed cut the overnight rate to 3.75% from 4.0%, its lowest since October of 2022. The cut wasn’t unanimous. Three members dissented for the first time since Covid. One voting member wanted to go bigger with a ½-point cut. Two voted no cut at all. You can see the divide. The government shutdown prevented economic data from being released and, in some cases, collected. That complicates an organization that claims to be data-dependent. America’s central bank has been caught up in controversy and conflict. There’s no sign of that ending either.
As for interest rate cuts, that might be all for the time being. The Market is now pricing in a 75% probability of no cut in January. It had been a coin flip a month ago. The Fed also announced it planned to expand its balance sheet. It’s going to buy more bonds. That’s definitional quantitative easing. But the Fed isn’t calling it that. They prefer the term balance sheet maintenance. The fact is, the Fed will be a buyer of short-dated Treasuries to provide ample liquidity. This expands the money supply. It’s a form of quantitative easing.
It’s important to remember, Fed Chair Powell’s term comes to an end in the Spring. He will not be reappointed to the post; That is crystal clear. The President is no fan of the Fed Chair. The Fed Chair reciprocates the sentiment towards the President. The new Fed Chair, yet to be named, will no doubt carry a tremendous amount of pressure to cut, early and often. He or she will have to cobble together a consensus. That will be a chore in and of itself. Everything is political these days.
The Market looks past the politics. Bond yields have actually risen while the Fed cut. The 10-Year Treasury yield snapped back to 4.2% ahead of the meeting, after making a visit below 4% in November. It immediately fell to 4.1% after the cut. It went into the weekend back at 4.2%. It’s an interesting dynamic. The Fed cut rates. The Market lifted them. The Market is always the one that leads.
Yields have been rising on the back end of the curve. The Long Bond, as measured by the 30-Year Treasury, is back near 5%. The yield curve keeps steepening. That’s generally positive, if happening for the right reasons. You may recall the yield curve had been inverted prior. That is not a normal and healthy situation. It has often pre-empted a recession. A recession never came. Things seem to be normalizing a bit now. Well, as normal as they could be in 2020s terms…
The Credit Market has been tightening. It shows very few signs of stress in the financial system. That is critical. Credit is generally one of the first areas to indicate trouble. Fortunately, it’s not indicating trouble. At least not now.
The Dollar has been weak. It has fallen back to the lows on the year, the lowest levels since 2021. The Dollar tends to fall when the Fed cuts. Lower rates compress the Dollar’s yield advantage compared to other currencies. That reduces the overall demand for Dollars. The aggressive tariffs and inconsistencies around foreign policy have also contributed to demand declines. The geopolitical environment is still pretty tense.
The weak Dollar has ignited a rally in commodities. Gold has been flying in 2025. It’s up over 60% and climbing. Copper is now playing catch-up. Precious metals have rallied all year on the back of inflation, the weak Dollar, aggressive foreign buying and geopolitical fears. It’s been more than a hedge. Gold has been a stellar appreciable asset. Beyond the AI-trade, it’s been Gold that’s been the star of the show this year. Industrial metals have come to life of late as they seem to be sniffing out an economic recovery in 2026. That’s encouraging.
Market leadership keeps rotating. It’s been moving away from Tech dominance into areas that have previously lagged. Financials and Health Care are among them. Industrials too. Thursday saw 100% advancers in Financials. There’s nothing Bearish about that. What’s more, the Banks saw a surge in 52-week highs not seen since last year’s election. Banks benefit from lower rates, as it tends to trigger more borrowing and more spending. That sends asset prices higher. The hope is the rate cuts have a material benefit to the struggles in Housing. Homeowner equity actually fell 2%. That equates to $13K per house nationwide. Housing prices have declined for the first time in 2 years. Of course, they’re still up 56% since Covid. High mortgages have been a major deterrent to transactions.
Something else interesting happened this week. After a 53-year stint, Walmart left the New York Stock Exchange. It landed on the NASDAQ. The move is mostly symbolic. The Tech-heavy NAS is home to the most innovative companies on the planet. Walmart wants to be viewed as a Tech-focused, AI-first company rather than the world’s largest store. In this Digital Age, America’s biggest retailer craves the circle of Tech Titans. Walmart will stay in the Dow too.
The Dow and the S&P hit fresh, all-time highs this week. The equal-weight S&P did as well. Notably, the Nasdaq did not. The Tech-heavy NAS hit its peak back on the eve of Halloween. It’s been sideways to down ever since. Those Magnificent 7 stocks have lost some magnificence. Many of the other 493 have come back to life. Despite the red finish on Friday, over half of the 30 Dow stocks were green. It’s really been a Dow week, with those Beautifully Boring Blue Chips leading. It’s doing it without AI.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
