Why the Dollar’s Drop May Be the Market’s Big Headwind in the New Year 12/14/23

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast

0:29We'll be right back.

0:48with the pivot party rolling on on Wall Street. The Dow hitting another all-time high during the session, ending the day with a record close. The S &P and Nasdaq also eking out gains, though the major indices all close well off their highs of the day. The big winner just might be the small cap Russell 2000, which jumped nearly 3 percent, touched its highest level since August of last year. But the real story of the market may lie not with the stock rally, but with the dollar's drop. The Dixie falling another percent today to hit its lowest level since July. It is now down more than 5 % from its October highs.

1:20So what does this dollar decline say about the markets and the economy? Chris, you brought this up on our midday call. We thought it was really interesting. The dollar is telling maybe a different story from the stock market. Yeah, I think it's ironic as we kind of get this pivot from Powell. You have the dollar just falling out of bed here, slicing through 103 on DXY. We've certainly seen Eurofirm. We've seen yen. I think that's the really big story from a macro sense. Is this the market's way of telling us that on the other side of this, either inflation actually re-accelerates and we're pivoting into that?

1:49Or is the market saying global growth may be turning up here? It's one of those two. And I'm not sure it's the best backdrop ultimately for the Fed into 24. And I think what's important when you look at what this weak dollar story has really catalyzed, it's a lot of the value oriented parts of the market. I also think it emphasizes this idea that if the dollar is starting to turn, every next incremental dollar does not have to come to the U.S. It's not lost on us that what made new highs before S &P, the DAX did, the Italian index, the Spanish index. So there's some global strength that I think has gone very under the radar.

2:28Weak dollar certainly supports it. So IWM, I mean, that move has really just been extraordinary since it was really down 160 something, not four and a half weeks ago, something like that. And now touched 200 today, which is kind of amazing. It's still I think there's still room to go because that divergence between the spiders and the IWM in terms of price to earnings multiple is was astounding. It still is very wide. You know, there's a lot being said about, well, small caps have not as good balance sheets. If that's the case, and we are with a lower interest rate environment, that's better, obviously, for the balance sheets.

3:07And if we don't have a recession, that's probably good for them, too. But I just think that the market was so in love with the Magnificent Seven that ignored everything else. There is a lot of value here. If you look at the 24, five-year history of the IWM, it has outperformed the spiders except for the last period that we've been in. So I think I think we could see a convergence continue. So I would think that the weak dollar is probably a symbol of the Fed easing. So I would have thought that that would go along with the Fed easing. So I think I'm not I'm not worried about that. IWM, 40 percent are unprofitable companies.

3:44So you would think that if the Fed eases, they have a better chance of surviving, not being profitable, but surviving. So I'm not really shocked by either. and then going into the last month of the year, what do people want to buy? What has not run, not what has already run? Yeah. I mean, this really sort of ignited the trades or has ignited the trades where financing was needed. Anything where you had to borrow money all of a sudden, that all looks good here. Yeah, it looks good right now as long as the economy is in good footing. And, you know, I'll just say this about the Russell 2000. I mean, you know, it has rallied more than 20 percent off its lows in the last month and a half.

4:20It's still down 20 percent from its all-time highs made in Q4 of 2021. And it was one of the first sectors to turn when the Fed indicated that they were going to start raising interest rates. So, you know, they led on the way down. And again, they're leading on the way up. But let's just see. To me, it looks like it's in a bit of an equilibrium. And again, it might be that rates have run too far to the downside in the near term to Chris's point about what the weak dollar might ignite going forward. I mean, Jeffrey Gundlach, we were talking about it last night on the desk. I mean, he seems a little bit worried about, you know, inflation picking back up.

4:52That being said, look at where crude oil is. Look at where NatGas is. You know, think about, and I'm just going to bring this back to large caps, right, which are very exposed to the dollar and a lot of these input costs. When you have a dollar move the way it has in the last two days, and you were an analyst and you're trying to think about the economic landscape and the visibility of the companies that you follow are in the new year, you say to yourself, two and a half percent in two days for a multinational. You know what I mean? that gets, say, more than half their sales outside of the U.S., and especially if some of these parts outside the U.S.

5:21are starting to inflect, let's say, before we are, at least that maybe that's what their stock market is. Well, that should buoy earnings. Okay, so like I get all that, lower rates should buoy earnings. So if you're looking, FACSET has, I think, expected 12 % year-over-year earnings growth for 2024. They're expecting less than 1 % earnings growth this year. They were up 4 % last year. So let's just say that 12 % is high, but with the dollar down and rates down and other input costs, Maybe that's how you get with more cost-cutting and the like. Maybe that's how a 19.5 multiple, if you look at consensus, is about$245 for earnings next year with a 4 ,700 S &P.

5:55It's 19.5 times. It's one or two turns over the 10-year average or something like that. So I can see why people are saying maybe we're not that expensive, especially if you take out those top 10 names. I'm not buying in there. I'm just doing that right now. I'm just making the case. What I think is a little ironic in this conversation is it was actually higher rates that helped a lot of these companies earn more. They got a return on cash. And you begin to wonder, is the market actually discounting a change in that function? What's a little unusual about when this is all happening, if you look historically, December is typically not a month for big change.

6:27It's typically a month that resembles the past part of the year. You reward the winners and you sell the losers for tax reasons. That has not happened here. For six weeks now, there's been all these little subtle hints of change. It's become certainly more overt the last several days. We see it with equal weight S &P over cap weight. Is it making you more skeptical of these moves then, or you think it's different this summer? You know what it reminds me of? It reminds me of in the five, six, eight weeks in November and December of 2021, where you began to see value flash some signs of life. And it didn't make any sense in context of the macro environment.

7:00And it set off this chain where value would work into 2022. I think there's some glimpses of that right here. In the context of this is actually a rotation that started weeks ago, maybe interpreting the market's move yesterday and into today isn't such a crazy thing. I don't think it is. I don't think it's such a crazy thing. I think it's just an extension of it. And I think it was so outsized with the MAG-7. But, you know, to Dan's point, Dan said a whole bunch of stuff there that was positive, I think, for the market. With oil coming in. And then he said, I don't believe any of it. Yeah, he doesn't believe it.

7:32No, no, no. I believe all of it. I don't think it's in the market right now. I think it's in prices. Well, I think the U.S., we went from worrying about SPR and worrying about oil price to now outputting oil at the highest level historically for the U.S. So that takes a huge headwind for the consumer and the markets. I mean, I think, you know, Dan, correct me if I'm wrong. I also think what you're trying to say, which I agree with, is there's a level where tenure yields down is not an easing of financial conditions. It's a message. Whoa, whoa, wait a second. Something's wrong. Or there's a level on crude where it reflects demand, not supply.

8:12And I think using the market as the gauge for when those hypotheses are actually realized is important. I look at discretionary versus staples. That's my barometer of the economy. When discretionary is outperforming staples, you're generally in pretty good hands. That has largely been OK for much of the year. But I think that's going to be a very important tell on whether, Dan, some of the things you talk about, the market begins to respect. I guess the question here is, I mean, we've had a precipitous move in the 10-year yield in just the past couple of days, right? And we're now below, well below 4%.

8:40So what is that level where you're like, oh, my gosh, what is going on here? And what is it saying about the economy and future growth? Where do you think we are there? Because 3.9 seems like great, amazing, amazing right now. I don't know if it's recession or if it's just, OK, this finally we've been waiting for the pivot. However, this giant run we've had in the market since October or whatever, 27th or whatever it was, was on that premise, right? That we will be at the end. So I would think that it's somewhat of a sell the news. That's sort of surprising to me, the magnitude of this. I still come back to something that was an issue a long time ago.

9:18It doesn't seem to be anymore, which is we're going to start to see a lot of 10 years for sale, right? The government has to fund. And so that's not that far away that we're going to revisit this issue. Now, it is good that rates are down. They're going to owe less interest. But nevertheless, supply demand dynamic is still in force. So I am sure Treasuries, which obviously was not the right place to be this week, but I haven't covered. I haven't added. I'm not quite sure what to do. I'm surprised at the magnitude of this rally, though. I guess it was because the message that Powell sent was so unexpected.

9:56Well, we were talking about this. Why did he seem to be giving it away for free? Exactly. I'm, you know, I'm done. Two weeks ago, he didn't have, he was the polar opposite of this. He said, we're not even thinking about thinking about cutting rates. And it confuses everyone. And this is my opinion that it's all posturing at a certain point. He wanted to talk the markets down and then have 12 days later for him to pivot like that doesn't seem like it's it's it's I'd rather have less transparency. You have to also remember that he's not necessarily speaking for himself when he's giving that press conference.

10:27He's speaking for the committee. So it could be that the committee is moving towards that, even though he may not personally be. I'd rather no one speak at that point. Just a blackout. Well, let's bring in the man who can answer all these questions here over the the moves over the past day and a half. begged the question, did Fed Chair Jay Powell send the right message to the markets? Steve Leisman joins us now. Steve, as Karen had, I mean, we were talking about this in the call today. I don't know why he did it. I don't really get why you would give that away at this point.

11:02So there's a lot of kind of post-mortem going on here, and I'm kind of settling on a really weird answer, which is the PPI. And I think Grasso's been around a long time. Melissa, you've been around a long time. Karen as well. Can't remember a time when the PPI has moved anything. What happened, I think in part, that PPI came in and I made a pretty big deal of it, I have to say, because of the impact it will have on next week's PCE. Powell mentioned the PCE and the PPI even during the press conference yesterday. He also mentioned that because of what happened, the wholesale price index coming in below, I can't wait I'm telling you this story and somebody hasn't given me the hook yet, but in any event, the PPI came in low.

11:52It caused people to reset the inflation number for next week to be lower. In fact, down in the two range, maybe two and a half. He even said that the Fed had already calculated, go back a little bit of the transcript, The PCE next week at 3.1, which would be the lowest, but there's others on the street like JPM and others that may have even lower numbers than that, if you look at it on a three-month annualized basis. So the point would be, and by the way, to finish the story, he says in the press conference that some people came in and changed their forecast numbers for the SEP because of that number that morning.

12:31So I think that part of it was overall, the theme here is the data changed. The data changed. There was a good PCE report last month. The wholesale report was good. The inflation number, the CPI number, if you take out the shelter was good. It became untenable to not change policy. And I'll tell you another reason why. If you do the math, which is plus two, it's very simple math. If they didn't change their policy now, they were going to be stuck with it until January, which means they would have not changed policy for six months. And this idea of, oh, look out, we're going to hike would have gotten to be a little silly.

13:15Would have gotten to be a little silly. So I think that's another reason. They had not moved since July. They would not have moved until January. So you couldn't stick around with the same policy. You had to tweak it. Now, another question you're asking was, did the market go too far and or did the Fed allow it to go too far? That's a different conversation. Do you want to have that? Tomorrow night? What do you think? They just told me to wrap. He must have known. They just told me to wrap. No, no, I'm going to keep asking you questions. If anybody said, oh, if Powell indicated that a pivot was in store, what would the markets do?

13:54I mean, it's a no-brainer that you would say the markets would rally hard. And so don't you think that he's thinking, oh, my gosh, financial conditions have just loosened significantly. Rights went down precipitously. I mean, all these reactions were very predictable. And yet he allowed it to happen when he didn't have to. Well, OK. Well, OK. Let's go back and do a little of the tail of the tape here, Melissa. All the caveats were there, right? We may hike again if inflation doesn't come down. We expect the economy to moderate. it. We expect the job market to keep loosening. We expect this progress to go.

14:30And if it doesn't keep going, if it doesn't keep going, well, then we may have to do something else. He said all that stuff. I don't know. First of all, let me tell you this. I agree with Grasso. It's hard to draw a line from his last public appearance two weeks ago to today. To me, that's difficult. I went back and reread that whole thing on the plane last night coming home. I couldn't get there, Steve. So I do think there was a big change. I don't know if it was the committee, him leading the committee, the committee leading him. Something happened in between. Waller came out and spoke the truth.

14:59He said, you know, said the quiet part out loud. If inflation goes down, we have to cut. It is a big change. Mostly, by the way, these things get telegraphed one way or the other. There was a debate about whether Waller came out and did it on purpose or was it just off the cuff. I tend to think it was a little bit off the cuff in that regard. But in any event, these things tend to be telegraphed. I thought this change was going to happen next month. I was going to go home and go out for drinks last night. I didn't have a chance to do that. I guess you had to cancel your plans. I mean, some might, if you were a Fed skeptic, a real skeptic, Steve, you might think that the Fed felt like they might be behind the eight ball with this drop in PPI leading to a much softer, eventually, PCI, and they've got to figure that they've got to pivot, and they've got to send this message really fast.

15:43Yeah, if you're Dan and you refuse to celebrate for even a single day and want to find something to worry about, that's the thing to worry about. Did they see something in the banking data? Is the 10-year being down telling you something more ominous about the outlook for the economy? Does the Fed see something coming down the pike that is worse? That is the thing you would worry about. You would also worry about the thing that you asked about, Melissa. I completely agree. This notion of whether or not the Fed has now loosened financial conditions. By the way, that was the first text message I got from a billion-dollar fund manager was, What is he thinking when it comes to financial conditions?

16:23That's the other side. And whether or not that has a negative effect on inflation. Those are the downsides. But you could also celebrate for 24 hours the Dow at a new high and interest rates coming down. So, Steve, the lower PPI, do you attribute that to just efficiencies, productivity, deflation? Some of the, you know, we had the logistical nightmare last year. Do you attribute it to that or do you attribute it to pending recession or starting recession? I think I think I don't know about the last part of it, but all the other things you said, there is some productivity out there. There's an interesting productivity story.

17:04Some Fed officials have started to think about this. It's too early to sort of say it's there definitively. The other thing that's happening is trade margins are part profitability and trade margins are part of the PPI. They've been coming in a bit. And so that's been something that's helped the PPI at the wholesale level. I'm also interested in this idea of whether or not we're breaking this kind of inflation culture that happened at the wholesale level and got passed on to the consumer level. If producers can't get the prices at the consumer level, they turn around to their suppliers and say, you know, sharpen your pencils.

17:42Do better for me. I can't pass along another 5%. That breaks the cycle, Karen. And I'm wondering if that's what we've been seeing in what has been, by the way, a series of very low wholesale price increases. Steve, thank you. Always great to get your take. Steve Leesman. OK, thanks. We've got a news alert here on RTX. Morgan Brennan's got the details. Morgan. Hi, Melissa. That's right. So leadership change at one of the largest aerospace and defense companies, RTX, the company formerly known as Raytheon Technologies, naming Chris Calio to succeed Greg Hayes as CEO. This is a formal transition expected to be completed on May 2nd of next year.

18:21Hayes will continue to serve as executive chairman. Calio has been elected to the company's board of directors. A little context around this. Wall Street has been anticipating that we would get a succession plan announced here for some time. It's a long planned transition. Calio, elevated to COO and president in March of 2022, was tasked with realigning RTX into three focused business units, Pratt & Whitney, Collins, and Raytheon. He's a nearly 20-year veteran of the company, rising through the ranks via Pratt & Whitney, the engine business. But again, a change for RTX as Greg Hayes steps aside next year and Chris Calio takes the reins as CEO.

19:01Melissa? All right, Morgan, thanks. Morgan Brennan. Well, one of our traders says the dollar's breakdown is adding fuel to the metals fire. The XME, the metals and mining ETFs surging nearly 4 % just today. Let's go off the charts with Chris here. I guess weaker dollar, stronger metals makes sense. Well, I think it really catalyzes two things with weak dollar. And if we look at DXY, as we talked about, it really just blew through 103 on the downside. But remember, DXY is mainly euro. Look at all the other pairs, particularly some of the Asian emerging market pairs, where you've seen considerable strength versus DXY.

19:30What I think it's catalyzed is a value trade. And a chart that we've been walking around with and showing as many clients as possible is the difference between large cap growth in value and small cap growth in value. The large cap growth value, as we know, is a week removed from basically being back at the highs. The small cap growth value index actually peaked back in June. It's been going straight down ever since. Why? When you look at what's in small value, you have a lot of financials, a lot of industrials. That has really catalyzed the shift towards a more value-oriented market down the cap scale.

20:02I think the second part of this is what it's done with the metals here. XME is the ETF, as we all know, basically a two-year breakout. Blew through 55 over the last several days here. Good-looking chart. What's in XME? It's all the usual suspects. It's Freeport. It's Southern Copper. It's BHP as well. One of our favorite names in the group. Golden Cross, 50-day up through the 200 on BHP. And if you want to look at the precious metals as well, I think the fact that gold held 1950 over the last several days and has come right back to the highs is another message that this weak dollar story has tentacles many areas that we look.

20:43You said this is a 5 ,000-year high on gold. Our charts don't go back that far. We'll take your word for it. Yeah, that's right. What's the trick? So actually, this is the first time, and I'll ask Chris this, too. This is the first time where you see the gold miners not outperform the metal, where it's usually a three to one outperformance because they have the ability to say, hey, let's not mine anymore, pull back and throttle so they could be more effective. I don't know what this is telling me that the miners are not outperforming. They're underperforming. Anything? My suspicion is, and Steve, you certainly know, you've been to this a long time, that the gold stocks have been perennial underperformers relative to the metal.

21:22So let's start the conversation with that. But they do tend to work at least initially when gold starts to get going. The fact that they're not tells me this gold story is more of a macro play than it is some commentary on how great the industry is. And I keep coming back to what is gold attempting to tell us? My suspicion is it's a commentary on U.S. dollar. The other thing about the U.S. dollar we didn't touch on is emerging market or foreign markets. Right. Some of the ones we look at. So for me, Mexico, Mexico is at a 10 year high now. It's been an enormous move. But across the board, I mean, Brazil also just I think maybe it's time for them.

21:59Coming up, we're digging into some after hours action. Shares of Lennar and Costco on the move after earnings and details from the quarters next. And a major move in Moderna. The pharma stock surging while some recent high flyers pull back. We'll tell you what's behind the moves. Don't go anywhere. Fast Money's back in two. This is Fast Money with Melissa Lee right here on CNBC.

22:27Welcome back to Fast Money. We've got an earnings alert for you on Lennar. Shares of the home builder lowered despite beats in the top and bottom line. Bertha Coombs is more in the quarter. Hey, Bertha. Hey, Melissa. Let's first start off with the fact that Lennar hit a historic high during the session. They beat on both the top and bottom line. Earnings coming in at 482 a share, well ahead of the estimate at 459. Revenues also well ahead at 10.97 billion. The street had been looking for more like 10 and a quarter. Gross margins, though, did miss at 24.2 percent, you know, with all of those mortgage incentives to entice buyers.

23:02But that resulted in a beat when it came to deliveries at 23 ,795 and new orders up 32 percent to 17 ,366. Both of those were a beat. In the release, CEO Stuart Miller talked about those incentives. He said the economic environment shifted as interest rates rose for most of the quarter and then subsided. Higher interest rates tested homebuyer sentiment, although purchasers remained responsive to incentives that enabled affordability. He added chronic supply shortage continued to result in housing demand outweighing short supply. Now, for 2024, he sees deliveries of about 80 ,000 new homes, but says we will not guide full year margins right now as interest rates, well, the environment is rapidly evolving, right?