Jason's World

Optimism abounded in the days and weeks after President-elect Trump’s victory for the tech sector as it represented a sea change from FTC Chair Lina Khan’s confrontational approach to Big Tech throughout President Biden’s term. When you look at stocks like Apple, Microsoft and Tesla, the enthusiasm was palpable. People thought that Trump was about to unleash a new era of market prosperity just like in his previous term before COVID.

Until some reality set in from the Fed. The recent meeting made it clear that the Fed’s belief that the inflation battle has been won has faded, as projections for inflation reaching 2% by the Fed have been delayed to 2027. Analysts are now penciling in only two cuts for 2025, as opposed to four previously.

And markets didn’t take that very well. On Wednesday, the Dow Jones dropped 1,123 points, the largest point drop of the year, putting the oft-mentioned “Trump Trade” in peril. Though markets have recovered somewhat today, other “Trump Trade” stocks continue to suffer losses. Bitcoin fell by more than $10,000 from its all time high. Tesla fell more than 3% on Friday after falling by almost 10% on Wednesday.

One of the interesting things to note is that forecasts pointed to this scenario long before the most recent Fed meeting. A month before the meeting, FedWatch predicted that the median value of the federal funds rate at the December 10, 2025 Fed meeting will be at 375-400 basis points, amounting to two cuts in 2025 from to the current rate. As the most recent rate cut by the Fed was widely expected, this still amounts to only two cuts in 2025, below the four that the Fed projected in September and in line with the most recent projection.

Now, after the Fed meeting and its subsequent fallout, the median scenario, albeit narrowly, is now only one cut by the end of December, according to FedWatch. Although projections of the interest rate at next year’s end have been scant, we have data that includes predictions of interest rates by the middle of next year. As recently as September, the expected federal funds rate for mid-2025 was 300-325 bp-5 25-pt rate cuts in 6 months, with the expected rate for this meeting lining up exactly as it turned out on Wednesday.

Upon observing the graph of projections, it appears that a sea change has occurred a month before the election, with the projection for rate cuts getting substantially worse. Many anticipate inflationary pressures from the policy proposals of President-elect Trump, who has promised to enact tariffs on Canada, Mexico and China as he takes office. However, investors have not acted on these fears until very recently.

This is an interesting phenomenon that warrants some study. The upward trend in projected interest rates has not had an effect on markets until recently. Stocks have even surged in the immediate wake of Trump’s election, the reality of the uncertainty not settling in until Jerome Powell himself changed his interest rate predictions for 2025.

The many due diligence methods that major funds use work in a similar way but in a significantly more complicated manner that reveals far less. Some even go far as to purchase satellite images to get snapshots of how companies are operating, in order to obtain trading tips. As AI continues to be more advanced, we could see trading decisions being made based on information that we might not immediately grasp.

A more simpler version of this, beginning with utilizing publicly available but not mass utilized data like the CME FedWatch, would be to rebalance our positions according to both the projected federal funds rate and the most recent projections for rate cuts directly Chairman Powell or another future chair. The weighting would be decided based on the degree to which Fed chairs have adjusted rate adjustment predictions toward FedWatch prognostications in the past. This will allow investors to capture shocks like what happened on Wednesday.