The Wall Street Debate Did the Fed Reverse Too Soon

The Wall Street Debate: Did the Fed Reverse Too Soon?

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The S&P 500 is nearing a record high after the Fed signaled it will cut interest rates next year. Investors are betting that the U.S. economy will achieve the rosiest of outcomes: a soft landing and lower borrowing costs.

But some Wall Street veterans are already raising questions about the Fed-driven rally and debating its durability.

The rise in stocks was almost unthinkable a year ago, as Wall Street delivered lackluster forecasts for the economy and markets due to recession fears and stubbornly high inflation. Instead, the benchmark S&P 500 rebounded, closing yesterday within 1.6 percent of the peak it reached in January 2022.

The latest good news for bulls: The Fed signaled Wednesday that it will cut interest rates three times next year as it forecast inflation to cool. Since then, global stocks and bonds have risen sharply, and investors are increasingly confident that the era of tight credit is coming to an end.

But the Fed's loose policy change has put European central bankers in a quandary. Futures traders bet yesterday that the European Central Bank would follow the Fed's lead and forecast aggressive interest rate cuts next year. Instead, ECB President Christine Lagarde spent much of her press conference trying to contain such expectations.

Wall Street is also divided over whether the Fed can cut interest rates. “I'm still not convinced that we're going to get the cuts that the Fed is talking about, and certainly not the cuts that the market is talking about next year,” said Lee Ferridge, head of multi-asset strategy at State Street Global Markets, DealBook said.

In the opposite camp: Economists at Goldman Sachs expect the Fed to start cutting borrowing costs in March, and futures traders have forecast cuts totaling up to 1.5 percentage points next year.

Is the Fed reversing too soon? Ferridge notes that U.S. consumers are still willing to spend, as evidenced by yesterday's strong retail sales, and that the economy and labor markets are still growing strongly. These conditions could release the genie of inflation from the bottle. “The inflation battle has not been won,” he said.

And Larry Summers, the former Treasury secretary and vocal critic of the Fed's handling of inflation, has expressed concerns that the U.S. central bank is sending mixed messages.

Why cut interest rates when the economy looks pretty good? That's a question market observers are asking, including economist David Rosenberg. The Fed's forecast rate cuts would suggest the U.S. is on the brink of a recession, he said. If that's the case, then why are investors buying stocks at such a rapid pace?

Ferridge noted a similar discrepancy. “It kind of shows how confused the market is” about the Fed’s messaging this week, he said. “What do you know?”

The Biden administration is pressing Israel to limit its campaign in Gaza. Jake Sullivan, President Biden's national security adviser, urged Israeli officials to end their large-scale ground and air operations by the end of this year and focus on more targeted tactics, The Times reports. The proposal is the latest sign that Biden, who has publicly supported Israel after the Oct. 7 Hamas attacks, is under pressure to rein in the country's military campaign.

The EU opens the door for Ukraine to join the EU. Even as Hungary forced a postponement of financial aid to Kiev, news that European leaders were ready to begin accession negotiations gave Ukraine some hope. However, it would take years for EU accession to even happen, and American military aid to Ukraine is still in limbo.

General Motors and its autonomous vehicle division are cutting jobs. Cruise is laying off around 900 employees, almost a quarter of its workforce. The move is part of a cleanup effort after the company pulled its vehicles off the road following an accident involving a pedestrian on Oct. 2. Meanwhile, GM is cutting 1,300 jobs in Michigan.

Netflix resumes advertising on X. The streaming giant is running ads on the social network again, The Wrap reports, after joining a boycott to protest Elon Musk's support of an anti-Semitic conspiracy theory. Meanwhile, Musk has told lenders of his $44 billion takeover of the company that they will not lose any money on the deal despite a huge loss in advertising revenue, according to the Financial Times.

When activist investor Nelson Peltz formally launched a proxy fight at Disney, his second fight in as many years, he invoked a figure from the company's past: Jay Rasulo, its CFO from 2010 to 2015.

The choice of Rasulo as director candidate (along with Peltz) is intended to create a contrast between the Disney of yesterday and the company of today, which faces many challenges.

Rasulo was once considered a potential successor to Bob Iger as CEO A Disney veteran with two decades of experience, he led the entertainment giant's theme park business, including the renovation of California Adventure Resort and the opening of Hong Kong Disneyland. He became CFO in 2009 and left the company in 2015 after Tom Staggs was promoted from running the parking business to COO.

Rasulo told The Times that his nomination does not mean he wants to return to management: “We can ask the right questions in the boardroom,” he said. “We can repair a ship that I really like.”

Peltz is trying to remind Disney shareholders of better times. “I want Disney to go back to the way it was when Jay Rasulo was here as CFO, because that's when the company understood the taste and smell of success,” the investor told the Wall Street Journal.

Ike Perlmutter, the former CEO of Marvel and one of Disney's largest individual shareholders, is another former Disney executive involved in the activist campaign. (Perlmutter was forced out of Disney in the spring after years of disputes with Iger and others.)

But Rasulo's background in finance could conflict with the creatives at Disney. The Journal reports that as CFO he focused on the profit potential of sequels:

“He told investors that Disney's priority was to produce more content like 'Toy Story' because big franchises were the best way for Disney to grow quickly and generate a lot of income.”

That focus appears to be waning at Disney after recent installments in the Marvel and Indiana Jones universes underperformed. At the DealBook Summit, Iger acknowledged that the company was making too many sequels without regard to quality: There had to be a reason “beyond commerce” to make one, he said.

— Steve Schwarzman, co-founder and CEO of Blackstone, in the investment giant's Taylor Swift-inspired Christmas video. The bold, confident clip explores the joys of alternative investing and features leaders like Jon Gray, its president, and plenty of glitter.

The deadline for the PGA Tour to finalize a deal with Saudi Arabia's sovereign wealth fund is less than three weeks away, but the American golf organization is still torn by internal conflict and distrust between players and executives, DealBook's Lauren Hirsch and Alan Blinder report from The Times.

A reminder of how we got here: The Tour and the Public Investment Fund signed a tentative agreement on June 6 to combine the PGA Tour with LIV Golf, its Saudi-backed rival. The deal was completed in secret, leaving the tour's players and most board members in the dark. Many details, including valuation and governance, must be resolved by December 31, but discussions may be extended.

The tour has made some concessions. In August, Tiger Woods joined the board, bringing the number of players and outside directors to six each. The tour also agreed to keep Colin Neville, a banker who advised the players, informed of negotiations with the PIF

But many players are still angry. “Since June 6, trust has been broken at the highest levels,” said Adam Scott, chairman of the Tour’s Player Advisory Council. “Nothing has changed to restore that trust.”

Among the frustrations is their limited influence over the appointment of outside directors. The resignation of AT&T CEO Randall Stephenson, which was supported by many players, also left a painful impression. (Two players served on a committee that recommended Stephenson's successor, Joseph Gorder.)

Some say disagreements are normal. “I learned that with any good board you need differences of opinion to find the best solution, and we had a lot of differences of opinion this year – even the players had differences of opinion,” said Webb Simpson, player and board member. “But we’re all trying to get to a better place.”

What next? The Tour is in talks with Strategic Sports Group, an investment firm led by Fenway Sports Group, owner of the Boston Red Sox, about a deal that would invest $3.5 billion in a newly formed for-profit company with a value of up to about $12 billion. Meanwhile, LIV is still looking for talent: last week it recruited Jon Rahm, who is ranked third in the world.

Offers

politics

  • Europe's top court sided with Amazon in the e-commerce giant's long-running tax dispute with the EU (CNBC)

  • Venture capital firm Andreessen Horowitz said it would get involved in politics and support candidates who favor fewer regulations on tech companies. (A16Z)

  • Kevin McCarthy, the former House speaker who is retiring from Congress this month, said his next career moves would include AI, space and making money from his Washington connections. (Axios)

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