Just About the Best News the Stock Market Could Get – and It’s Not NVIDIA’s Earnings

By Robert Wiedemer

February 22, 2024

Yesterday, we got just about the best news the stock market could get.  I’m not referring to NVIDIA’s spectacular earnings announcement, although that was pretty amazing. NVIDIA’s GAAP earnings were up 765% from a year ago.  That’s fairly unbelievable for a company that is 30 years old and not coming out of a big economic downturn. 

Many stock investors will see NVIDIA’s earnings as a confirmation that Artificial Intelligence is real, or at least not so artificial, since NVIDIA’s chips are important to AI applications.  That kind of thinking will drive up the whole stock market, not just high tech.

However, the best news for the stock market yesterday was kind of buried in the release of the Fed meeting minutes.  The minutes give a detailed report of the recent Fed meeting which can help give us a better understanding of the Fed’s thinking and where its rate policies might be heading.

As background to what the minutes said recall that in my Bull Bear Updates and Insights over the past year one of my biggest concerns is that the Fed will be reluctant to stop selling bonds.  It has been selling as much as $100 billion per month. 

When the Fed sells bonds, it puts upward pressure on the 10-year interest rate.  They can make a big announcement about lowering the overnight rate, but if they keep selling bonds, the 10-year rate will keep moving up.   And it’s the rising 10-year rate that negatively affects stocks, bonds and real estate.

If the Fed is reluctant to stop selling bonds, it might let the 10-year rate rise to 5.5% or 6% before there is enough pain out there for them to stop. 

The Fed to Reduce Bond Sales in March

However, the Fed meeting minutes made clear that they intend to reduce the sales of bonds after their March meeting.  This possibility was discussed earlier, most notably by Nick Timiraos the Fed reporter for the Wall Street Journal.  However, seeing it in the Fed minutes makes it far more likely that the Fed will reduce sales of bonds in March.

The current assumption is that the Fed will cut in half the amount of bonds they sell after their March meeting and may decrease even further.  This reduction in bond sales was guaranteed to eventually happen; it was just a matter of how much pain the Fed would put markets through before caving in and beginning to reduce.

Part of the reason they have caved early is that they are generally supportive of the economy and stock market.

But there is another more important reason: the US is running out of money to fund the deficit.  Hence, the Fed needs to move away from vacuuming up money and go back to printing money because US and foreign bond investors will soon be tapped out.  I’ve written a separate article on this because it is so important.  Keep an eye out for it.

Interest rates on the ten year bond of 5.5% or 6% are the single biggest threat to the stock market this year.  As of yesterday, the sounds of the artillery of very high interest rates have faded dramatically.