THE DEAN’S LIST: The Dots Did The Damage.

The Federal Reserve raised interest rates Wednesday for the first time since July 2023, and the S&P 500 finished the week down a tenth of one percent. The quarter point was never the story. I told you last week the dot plot was, and that was spot on. But it also told me I was half wrong about what this Fed intends to do. The Single-Digit Millionaire portfolio is unchanged, with cash, gold, and a little bitcoin and ethereum still doing three different jobs.

Dean’s note:
On Wednesday, the Federal Open Market Committee raised the target range for the federal funds rate by a quarter point to 3.75% to 4.00%. The vote was 12 to 0. It is the first increase since July 2023. Chairman Warsh said the committee acted to ensure what he called a timelier return to the price stability objective, and he said underlying inflation trends have not meaningfully improved. Stocks dropped on the day, but only a little. Then they took almost all of it back on Thursday and finished the week roughly flat. Not too shabby for the optimists in the room.

Last week I wrote that we thought this was more likely an insurance move against an energy shock than the start of a longer campaign. The dot plot came out, and 16 of the 18 participants penciled in another increase, with four seeing two more. I was right that the dots were the story and wrong about what they would say.

The important part is how well the market is digesting this seemingly bad news. Its resilience is remarkable but not a big mystery given what the bond market is telling us. The committee is split three ways on where this story goes in 2027, but long-term yields actually moved down. I am not sure if there will or won’t be one more hike to come, but regardless, we see a long pause in 2027 while the Fed finds out what a $100 barrel does to everything else.

The bond market’s answer was the most useful thing that happened all week. The 2-year yield rose to 4.75%, which is the front end simply repricing for a Fed that just moved and says it may move again. The 30-year went the other direction and finished at 5.33%, down slightly on the week. The 10-year touched 5.041% on Tuesday, then snapped an eight-day rising streak on Thursday. So the curve flattened. Our read is the long end had already priced this hike and then some, which is what we said a week ago, and this is the part of that call that held up.

Then Admiral Brad Cooper, who runs U.S. Central Command, said oil and liquefied natural gas shipments through the Strait of Hormuz over the past two weeks reached their highest level in six months. Oil has fallen four sessions in a row. WTI is back under $100. 

None of that means the conflict is over. Iran’s Revolutionary Guard said it struck a Togolese-flagged tanker. Houthi forces hit Saudi Arabia with missiles and drones, and air raid sirens sounded in Riyadh for the first time in months. The President is at the United Nations this week weighing what he has called a major decision. All of that is real. The ships are still moving, and our read is that the price is following volumes over headlines.

Five sessions, one rate hike, and a week that ended almost exactly where it started.

Monday (September 14): An ugly start on two unrelated headlines. Bank of America’s chief executive told the Barclays financial services conference that third-quarter investment banking fees would come in roughly 10% to 20% below a year ago, and the S&P 500 banking sub-index fell 2.7%. Separately, the heads of Anthropic and OpenAI called for slowing the pace of frontier AI development, and the chip and AI infrastructure names sold off. The S&P 500 fell 0.75%, and the Nasdaq lost 1.17%. Brent touched roughly $109, a four-month high, after talks in Oman were postponed.

Tuesday (September 15): The Fed began its two-day meeting and the bond market front-ran it. The 10-year Treasury yield rose to 5.041%. The S&P 500 lost 0.45% to 7,585.73, and the Nasdaq dropped 0.78%. 

Wednesday (September 16): Decision day. The Fed hiked a quarter point to 3.75% to 4.00% on a unanimous 12-0 vote, and the projections showed 16 of 18 participants expecting another increase. The S&P 500 fell 0.5% to 7,551.81. The VIX jumped to 17.71. Warsh held what Bloomberg described as a record short press conference.

Thursday (September 17): The turn, and the biggest gain in six weeks. The S&P 500 rose 1.1% to 7,637.76 and the Nasdaq 100 added 1.7%. Oil fell, the 10-year snapped an eight-day rising streak, and the VIX dropped to 15.44. Nothing about the Fed’s decision changed. Falling oil and falling yields changed the reaction to it.

Friday (September 18): Triple witching, with roughly $6.2 trillion of options expiring. The S&P 500 added 0.17% to 7,650.50 and the Nasdaq rose 0.39% to 26,522.55, while the Russell 2000 lost 0.5% to 2,860.40. The VIX finished at 14.81. Brent ended the week down 1.2% as traders decided the Saudi pipeline damage would bite less than first feared.

Monday (September 21, yesterday): Brent opened the week near $102 in Sunday-evening trading and fell to $100 Monday. Reports of possible diplomacy at the United Nations this week put on some pressure. Equities are running Monday with tech leading.

The committee raised the target range a quarter point to 3.75% to 4.00%, unanimously, for the first increase since July 2023. The Summary of Economic Projections is where the damage came from. Measured against today’s 3.875% midpoint, 16 of the 18 participants projected at least one more quarter-point increase by the end of this year, and four of those projected two. The median puts the funds rate at 4.00% to 4.25% at the end of 2026 and holds it there through the end of 2027.

Look one column further out, and the picture loosens. Against the 4.125% level most of them expect at the end of this year, eight participants put 2027 higher, six put it at the same level, and four put it lower. The dots are published without names attached, so nobody outside the room knows which one belongs to the chairman.

Dean’s note:
The quarter point was the headline and the dot plot was the story. That was right, but the dots did not say what we expected. We had this as insurance against an energy shock rather than the front end of a campaign, and 16 of 18 participants disagreed in writing. I think one more move is now irrelevant even if it happens. More importantly, the market expects a long pause in 2027.

A 12-0 vote tells you almost nothing. Nobody dissented, which means the argument happened before the meeting rather than during. Warsh said the committee acted to ensure a timelier return to price stability, and he said underlying inflation trends have not meaningfully improved.

That sounds odd next to core CPI at 2.4% year over year, its lowest since March 2021. It sounds a lot less odd once you use the Fed’s own yardstick. Fed targets PCE, not CPI, and the committee put median PCE inflation at 3.7% for this year and median core PCE at 3.4%. It does not see core PCE back at 2.2% until 2028. Warsh held the shortest press conference on record.

Dean’s note:
PCE and CPI are different baskets weighted different ways, and the gap between them is the whole reason this committee sounds more worried than the headline suggested. CPI is fine. But hot core PCE is concerning because housing isn’t a huge weight. Healthcare, financial services, and insurance costs are stubbornly rising inside. This is confusing to everyone, especially Warsh. So the short press conference reflects a need for more data and less confusion, which shall come in due time. It leaves less to read, which means the projections carry more weight than they used to.

Admiral Brad Cooper, the head of U.S. Central Command, said oil and liquefied natural gas shipments through the Strait of Hormuz over the past two weeks reached their highest level in six months. Satellite imagery suggests Saudi Arabia moved 2.8 million barrels a day through the strait over a recent six-day stretch, against roughly 700,000 barrels a day in August. Aramco has reportedly sold as much as 60 million barrels from Ras Tanura for September and October loading using ship-to-ship transfers, and expects to restore about half the daily flows on the damaged East-West pipeline.

The statements went the other way. Iran’s Revolutionary Guard said it struck a Togolese-flagged tanker called the Trend, a claim not independently confirmed as of this morning. Houthi forces hit Saudi Arabia with missiles and drones on Saturday, and sirens sounded in Riyadh. Crude has fallen four sessions in a row anyway.

Dean’s note:
 I have been repeating the same six words since July: watch the ships, not the statements. A named four-star officer and satellite imagery both put traffic through that strait at a six-month high, and the price is behaving the way a price behaves when supply is quietly coming back. Meanwhile, the headlines are the loudest they have been all month. Hold both. The escalation risk is real, and one event can reprice crude in an hour. But when a measure of volume and a dramatic press release point in opposite directions, our read is that volume is the harder thing to fake, and it is the one I watch.

The 2-year Treasury yield finished the week at 4.75%, up from 4.63%. The 30-year finished at 5.33%, down from 5.36%. The 10-year touched 5.041% on Tuesday, its highest since 2007, then snapped an eight-day rising streak on Thursday and closed the week at 5.01%. The gap between the 10-year and the 2-year narrowed to about 26 basis points from roughly 35.

That is a textbook shape for the week. The front end reprices for a central bank that just moved and signaled more. The long end does not follow, because the long end is pricing a different set of questions or discounting this move far ahead of the actual hike.

Dean’s note:
You will read this week that a flatter curve proves the bond market believes the Fed will win on inflation. That’s not fact yet. A flatter curve can mean contained inflation expectations. It can also mean rising worry about growth or a policy error. What I will say is what we said a week ago, that the long end had already priced this hike and then some. The long bond is still the adult in the room. Let’s keep an eye on it.

On Monday, Bank of America’s chief executive told the Barclays Global Financial Services Conference that third-quarter investment banking fees would come in roughly 10% to 20% below a year ago, at $1.6 billion to $1.8 billion against $2.0 billion, and that trading revenue would be roughly flat with weakness in fixed income. He described the softness as industry-wide, saying the investment banking market generally is down around 10%.

The S&P 500 banking sub-index fell 2.7% that day. Goldman Sachs dropped about 4% without having said anything at all, then kept falling. Over the week, the financial sector fund XLF lost more than 2%, its worst week since March, and Goldman and Bank of America each finished down roughly 8%.

Dean’s note:
One executive gave investors a weaker revenue outlook at a conference and took roughly eight percent off his own stock and eight percent off a competitor that never opened its mouth. That is what happens when a whole sector is priced for lower rates and a capital-markets recovery that never arrives. On a positive note, nobody said anything about loan losses or funding stress.

Stay invested. Stay selective. And update the view when the evidence shifts.

The Fed hiked for the first time in more than three years, the dots said more is coming, oil fell anyway, and the S&P 500 finished the week down a tenth of a percent. Here is what I am carrying forward.

•   The hike is done, and the dots are the live question. Against today’s midpoint, 16 of 18 participants see at least one more increase this year. Our base case is no more rate hikes in 2027, and we think markets are pricing something similar.

•    Read what the Fed says and what it projects, not just how it votes. A 12-0 vote carried no information. Median core PCE at 3.4% for this year, in the Fed's own projections, explains the hawkish tone better than any quote does.

•   The ships are moving. Hormuz oil and gas shipments hit a six-month high over the past two weeks, according to Central Command, and crude has fallen four sessions running. That is the best evidence we have had in two months.

•   The curve flattened, and nobody should tell you exactly why. The 2-year rose to 4.75% while the 30-year eased to 5.33%. Our view is the long end front-ran this hike. That is a view, not a reading of the bond market’s mind.

•    Banks are priced for a capital-markets recovery that has not shown up. One weaker guide from Bank of America, roughly 10% to 20% off last year’s investment banking fees, cost the sector its worst week since March. Bank stocks rise when the yield curve’s slope rises. We’re seeing the opposite now.

•   Where your plan, your cash flow, and your emergency reserves support it, a rate hike is not, on its own, a reason to stop contributing to your 401(k). The 2026 elective deferral limit is $24,500. A super catch-up of $11,250 takes the total to $35,750, but only if you turn 60, 61, 62, or 63 during 2026 and only if your plan permits catch-up contributions. If your prior-year wages from that employer topped $150,000, your catch-up generally has to go in on a Roth basis where the plan offers it. Ask your plan administrator, not me.

•  Volatility ended the week at 14.81, lower than where it started a week with the first rate hike in three years. Keep in mind the VIX measures expected S&P 500 volatility over about the next month and nothing else.

A week with the first rate hike since 2023, a hawkish set of projections, a tanker attack, missiles over Saudi Arabia, and $6.2 trillion of expiring options produced a tenth of a percent of damage to the S&P 500. I keep pointing at that gap because it is where the money is made and lost. And the quieter story remains intact. The equal-weighted S&P 500, the Russell 2000, and foreign stocks have all contributed this year, whatever the headlines say about a handful of giant stocks running the show.

- Dean

P.S. The number I cannot stop looking at is not the hike. It is the 2027 column of the dot plot. Against the 4.125% level most officials expect at the end of this year, eight of them put 2027 higher, six put it at the same place, and four put it lower. That is eighteen people who meet eight times a year, share the same data, and land in three roughly equal camps about where this ends. Anybody selling you certainty about rates two years out is selling you something the Federal Reserve itself does not have.

And one more thought. The strangest headline of the week had nothing to do with the Fed. On Monday, the chief executives of Anthropic and OpenAI called for slowing the pace of frontier AI development, and semiconductor and AI infrastructure stocks fell on it. Think about what that is. The people building the thing suggested building it more slowly, and the market immediately repriced the companies selling them equipment. Whatever you believe about the safety argument, the market read it as a capital spending signal, which is a reminder that the AI trade currently rests on a small number of firms continuing to spend at an extraordinary rate. That is not a reason to avoid the theme. It is a reason to know what you own inside it, and to pay attention when the buyers start talking about buying less.

👉 If you want to see how I am positioned after a rate hike, a hawkish dot plot, and an oil price that is falling while the headlines get louder, the full Single-Digit Millionaire portfolio is laid out in the open at my site. You will find the cash, the gold, and the small crypto sleeve. You will also find the risks, because they are real. Gold has long, ugly drawdowns. Crypto can halve, and it just ran hard. Cash costs you return when stocks run, and cash is exactly what a 4.75% front end makes tempting. Nothing in there is a guarantee, and none of it is built around a single week. It is free to read, and it is written the same way this letter is.
This newsletter is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Consult with a qualified financial advisor before making any investment decisions.