The Fed’s Transitory Gamble: Is Wall Street Betting Too Big on Q4?

Wall Street is banking on a strong Q4 rebound — but is it too risky? In this episode of The Money Runner, David Nelson dives into the Fed’s renewed use of the word "transitory" and what it means for investors. With 2025’s market outlook heavily dependent on a late-year recovery, are we setting ourselves up for disappointment? Tune in as David breaks down the risks, the data, and the strategies to navigate this uncertain landscape.

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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Welcome to the pod, everyone. I'm David Nelson. It is Friday night. It's right after the close. In another wild week. And I wanted to give you something to think about over the weekend. The good news, we finally put in a positive week, first week in five with the S&P 500 actually closed higher than the week before. It's been a chaotic few months. We've roared into January, but it's the administration's focus shifted, moving away from maybe using the stock market as a barometer of success. And now they're focused on another set of tools designed to address broader economic concerns. That uncertainty has forced an unwind. Now, I can't put hard numbers on this yet, but Bank of America securities analyst Jill Hall, she makes a great point. And in a recent note, while retail investors have been buying the dip hedge funds they've been selling. Why the disconnect? In a word, leverage while you at home rarely go into margin to buy stocks. Leverage is the lifeblood of many hedge funds. They're often running money with both long and short positions. Hedge fund managers, they have to level up to get outsized returns. If you have a model that is equally long and short stocks, you need that leverage to enhance the returns because in a bull market, you will never keep up. However, when markets head south, that leverage can turn into kryptonite as managers look to unwind all at once. Selling begets selling. You know, I saw a similar price action like this in 2008. If you were hedge fund running money, levered up even just 2 to 1 and decide that risk is too high, you're going to dump a lot of shares. Now, multiply that with all the institutions looking to do the same thing. It's a train wreck. And in the midst of all that chaos, we have to identify what's working, what isn't, and what's next. Welcome to the Money Runner. I'm David Nelson. let's break down the data. Like I said, the market did show some resilience this week, but it wasn't much to brag about. Market corrections often expose cracks in the bull thesis, but they also almost always give us a new slate of opportunities. And this one isn't any different. Now I want to pick up where I left off last week, but I added some data that I think is key to understanding this decline. Look at this chart from the S&P 500. Again, get the earnings estimates in top and gold underneath it. You get that p e ratio, a valuation metric and of 82 more dividend yielding free cash flow yield. Now the level we hit last Thursday, that's proved important because it coincides with two other bottoms from last year and both were 20 times blended earnings. Now holding that level, it's a positive sign. Now, this is where I think it gets interesting. This chaotic looking chart shows the S&P 500 price in white and you've got quarterly earnings estimates in separate lives. Now, focus on the blue line. That's the one that's different, right? Because that's not from this year. That's fourth quarter last year. Now they've already reported and it's in the books, The Rising Blue Line from January. That's where the earnings started getting report. And what we learned was earnings came in way better than expected. That's the good news. The bad news is that company, if the company started cutting guidance for the coming quarters and you could see that in the Q1 line, that's trending lower and that's content continued to trend lower for most of the last couple of months. Same for Q2, say for Q3. The only positive right now that I can get from all this is that we've lowered the bar and maybe it's going to be a little easier for management to step over, you know, this lowered bar. But we're going to listen to the earnings calls because I think like most quarters, it's not going to be so much about what they report. It's going to be about the guidance that follows. And this is where it gets important, because the only thing that is holding up 2025 earnings right now is Q4 for this year that's still holding up. And I think the consensus is right now, analysts are thinking to themselves, well, we got a lot of issues to deal with right now. The market's going to sort it out. The more the stocks are going to sort it out and the economy will sort it out, the administration will sort it out. And the hope, I guess, is that by the fourth quarter this year, everything will be back to normal. I think that's pretty optimistic, but I think that's really where consensus is right now. But we're getting it on the comm and and this is becoming a very backend loaded 2025. The highlight of the week has to be the Fed meeting. Now, look, I know I beat up on the Fed and Jay Powell a lot, but I also know how difficult it is to run central bank policy. You're trying to steer the US economy and balance a dual mandate of full employment and low inflation, with a limited set of tools that take close to a year to wash through the system right now. But fund futures suggests two potential rate cuts. That's pretty different than where we were just a couple of months ago. Now, while that sounds bullish, remember the reason for those cuts matter. If the Fed is cutting because inflation is cooling, that's great. But if they're cutting because unemployment is rising and the economy is faltering, that's a problem. No. I also notice that Fed Chair Powell dusted off a very dangerous word, transitory. You remember 2021, inflation was called transitory. That miscalculation proved costly. Some final thoughts before we close out the week. The administration's focus on tariffs and reciprocity has added another layer of uncertainty, which is playing out in real time each and every day. And whether you are for or against this, besides the point, there is a new playbook with new rules and you have to adjust to play this game. Now, here are some key changes that I started making a few weeks ago when it became clear that the drivers of this market were going to be very different than a year ago. Values stocks make up a larger percentage of the portfolio. I have an abandoned growth proposition. Sizes are smaller. The overall dividend yield of the portfolio is higher than it was at the start of the year. And finally, I prioritize companies with strong domestic revenue streams less vulnerable to tariff disruption that could impact revenue and cost of goods sold. Well, that's it for this week. I hope you enjoyed the show. If you want to learn more about yours truly and the Money Runner, go to my substack site. dcnelson123@substack.com. I'm David Nelson and this is The Money Runner.