Hey guys, it's Sasha. The S&P 500 closed out last week at a new record breaking through 5,000 points for the first time. The NASDAQ 100 also hit a new all-time high and so did the Dow Jones Industrial Average. The stock market in the US is exploding since the 25% drop in 2022, and the big question is why interest rat are still sitting at a high level in the US.

The Fed rate is at 5.25 to 5.5% range. and in a recent interview, Jerome Powell said that the FED is not planning to reduce interest rates anytime soon, although they do think there will be three interest rate Cuts later on in the year. Now before that interview, the markets were betting on six rate Cuts this year. pretty much a cut at every meeting starting from March.

So how come? Why is it that the stock market is booming and what's going to happen when interest rates actually start coming down at the same time? Jobs data continued to be strong with a good January report. Non-farm payrolls in the US went up 350 3,000 in January which was a lot more than analysts expected. And the commonly accepted narrative is that if jobs are doing well, then the FED doesn't need to reduce rates because you know the FED has two objectives, right: keeping inflation low and keeping jobs High. Well, there is a third objective, but most people, especially people in social media, tend to forget about it.

It's subtle, which is why most people miss it. Section 2A of the Federal Reserve Act says that the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain the longrun growth of the monetary and credit Aggregates commensurate with the economy's long run potential to increase production so as to promote effectively the goals of Maximum employment, stable prices, and moderate long-term interest rates. And this is really important as a point, because it is common for analyst to say well, inflation is on the way down, but it's not there yet. Jobs are doing well, so the doesn't need to reduce rates because those are the only two reasons why they would.

Well, technically it does, because moderate interest rates are actually their third explicit objective and everyone takes what J Powell says as though it's gospel. He says that rates will drop very slowly. they're not going to happen at any point in the first half of the year, so everyone just believes him. Just like in November 2021, he said that interest rates don't need to go up at all ever, and inflation will just go away all by itself because it's transitory.

Tomorrow, we're going to see the first inflation data of this new year and I'll be dissecting that data when it comes out. But the thing is, we already pretty much kind of know what the numbers are going to say. The Wall Street consensus on that read is that it will drop to 2.9% below 3% for the first time since this whole inflation Spike started in early 2021. And the reason is because month-to-month inflation reads in the first few months of last year were very high.

I've been talking about this for months already and it seems like even Jerome Po now understands this concept. Amazing! In his recent interview with CBS, he said I Think the base case. the main expectation I would have is that inflation will continue to move down in the first 6 months of this year we expect. So we look at inflation over a 12-month basis.

That's our Target and the first five months of last year were fairly High readings. So he knows that the inflation data has an overwhelming likelihood of coming down in the next few months, right towards their 2% Target. But the problem with Jan Powell and with the FED is that they refuse flat out to try to understand what is coming and address their policy. change their approach, steer their decisions according to what they're seeing in front of them.

Instead, they prefer to stare in a rearview mirror and they'll only make any kind of adjustment once. Whatever it is that was coming TOS them has already happened. Instead, they prefer driving the economy staring blindly in the rearview mirrror. This is why they didn't increase rates for the entirety of 2021 when inflation was going absolutely nuts.

And it is exactly the same reason why they are not reducing rates. They've not been talking about it when it the whole thing that we're seeing right now is obvious and has been obvious for many months already. until inflation hits that 2% marker. Or thereabouts, these Dems will just keep sitting there repeating the same over and over about you know, needing to see more data and in the meantime they are risking sending the US economy into a deflation spiral, which would be a lot worse than the inflation that they are trying to cure to understand what we might see this year.

It's very useful to see what happened back in 2022 because at the moment everyone says that the interest rate drops that are coming are of course already baked into the market valuations. All of these smart people on Mory they've already accounted for all of this and that's why the US Stock Market is running so hard now. At the end of 2021, inflation was sat at 7% and the FED had not yet started increasing interest rates and inflation kept going up. The first increase came in the middle of March 2022, so you could argue that at the start of 20122, everyone knew what was going to happen, right? Inflation was having its biggest spike in 50 years and interest rates were obviously going to have to go up, but the stock market was still surprised when it happened because it peaked right towards the end of 2021 and then collapsed by 25% to a bottom in October 2022.

Consumer confidence was destroyed during that year and was at its bottom in Q4 2022. After 2 years of high inflation, that made it very difficult for people to make ends meat. In the meantime, despite the rate increases, the US economy has remained surprisingly resilient. US GDP is been going up much higher than other developed countries during this period.

Us Jobs data has been posting very strong numbers every month since the Co crash, and unlike some other countries, the US has avoided entering a wage price spiral. All good things. So today, apparently the stock market knows for sure guaranteed that the interest rates are coming down and they will of course have bake these into the valuations right. But remember that for the last year, the S&P 500 is being driven by the seven big tech stocks on the back of an AI heye wve Meta stock is up 400% Nvidia stock is up 500% Even Microsoft stock is up 100% or whatever.

The rest of the stock market has still not really recovered from the 2022 crash. It hasn't gone back up. In fact, without that boom of a small number of tech stocks, 2022 would have definitely been called a major stock market crash because the those small number of tech stocks have covered, they've OB fiscated. What actually happened with a vast majority of the market that excludes them, the rest of the market went down a lot more.

Here is a comparison of the S&P 500 the white line on this chart versus the S&P 500 Pure Growth Index. You can see that over the last 3 years, the S&P 500 has grown 88.7% per year. On average, it dipped in 2022 and then it went back up in the same time period. The S&P 500 Pure Growth Index is up 0.39% on average, basically at zero.

It crashed in 2022. and yes, it actually crashed because it went down almost 40% and it did not recover in 2023. It's interesting because that Pure Growth Index does not have the big Tech except Nvidia which is the biggest position in the index. If the P Growth Index did not have Nvidia, it would have been negative over the last 3 years, while the S&P 500 is up 9% per year.

The reason this is really important to understand is that the news focuses on the big companies. When people talk about the stock market, they talk about the big Tech. So you don't really hear about the fact that the stock market crashed in 2022 except for that small handful of companies and it still hasn't actually started properly going back up two years later. But just like interest rate increases and a reducing consumer confidence destroyed those smaller companies back in 2022, it's going to be very interesting to see what happens when the reverse comes.

the moment that rates start dropping and consumer confidence returns. We already know the consumer confidence is on the up. It's coming back from multiple different data sources. Advertising revenue, for example, has gone up massively in Q4.

It's going up even more in Q1 because I could see it in my advertising data across the different businesses. Meta and Google posted very strong advertising Revenue numbers for Q4. But going back to this chart, do you know precisely when Jerome Powell went from saying no, we don't need to increase rates to yes. Okay, we will definitely start increasing them as soon as possible possible.

Well, that point is right here and at the moment we're still hearing a lot of ooh uh, we need to be very careful. We must not reduce rates before it's the right time. There's only going to be a very, very slow reduction, blah blah blah and everyone believes this, even though we have copious amounts of evidence that you should not believe anything that comes out of Jan Power's mouth. and at some point soon, we're going to hear the exact opposite of that materialized.

Tomorrow, we get the January inflation data and the next month in March We will get the Fe data and you can see that they will be replacing the plus 0.5% month-to-month movement from January last year and the plus 0.4% month-to-month movement from February. So there is a very high likelihood that when the FED meets in March, the US inflation rate will be sitting somewhere in the maybe 2.7% range I Don't know, a lot lower than it is today, somewhere in the 2 something range. But the members of the Fomc have been giving many interviews recently saying that the reducing rates in March is way too early of course. So even if the data says that they absolutely should, they probably will not, because playing politics and saying that you've done something because you said it a few months ago is more important than you know using data and doing the right thing analytically.

But the key here really is going to be in the rhetoric: I Think based on what we're seeing with the market in the past based on what people are listening to because I am expecting at that next meeting when they should be reducing rates, but they probably will not because it's not in my rearview mirror for Jerome Powell to pretty much come out and say like, look, we're not reducing rates right now, but from the next meeting after that which by the way runs from April 30th to May 1st from that meeting, the FED will start reducing rates because the data is now ready and the moment that comes out of his mouth the moment those words leave his lips with some kind of level of certainty behind them, the market cycle is going to to flip once again at the moment small growth companies continue being very heavily discounted because of the high interest rates and all the perceived uncertainty. and Wall Street analysts tend to just plug in whatever numbers that Jan Powell says because they don't seem to actually do any analysis of their own. There still seems to be this overwhelming story narrative out there that the economy is doomed the biggest ever stock market crash and whatever is 100% Definitely coming cuz people just keep saying the same over and over. And gas prices have collapsed in 2024.

Look at this chart: Oil prices have continued to be moderate as well, so over the coming months these should filter through into energy bills and it will filter through into the cost of all the other goods and services that use energy as well. In April we have another big substitution month where last year's increase was relatively high. So if this year's increase is not as high, you're still going to get quite substantial reduction in the inflation data. At this point, we have a higher likelihood of us inflation dipping below 2.5% Remember that Without Shelter US Inflation is already and has been for several months below 2% This is really important.

Shelter is a lagging indicator, house prices and rent prices, and all of these things are way ahead of where the shelter number is, But without shelter, everything else has been at sub 2% For a while, the April inflation data will come out in May and there are five more Fed meetings after that point through to the end of the year. And I know that Jerome Powell said some in a recent interview. It doesn't really matter though, because eventually he will say some other. That's the complete opposite, but nobody will remember what he said just now.

He will have no option at one point once the data starts showing up in his rear viiew mirror and I don't know about you, but I Personally am very excited for how the market might react once the rate drops start actually arriving, Because remember, the upper bound of the Fed rate right now is at 5.5% at the moment. That is a heck of a lot of decreases between that and where just inflation is headed at the moment. Now, the New York Fed recently published some research that says that if inflation was under control, the neutral Us interest rate like the interest rate that they would need to keep for things to be just steady and flat would be 0.9% and that is a lot of 0.25% steps down from the 5 .5% that we're at right now.