The Dot Plot Thickens

Andrew Wilkinson sits down with Nasdaq’s Kevin Davitt to unpack the Fed’s latest moves, labor market shifts, and what the updated dot plot really signals for investors. From rate cut debates to options market trends, this episode dives into how the story behind the numbers is shaping markets.

Summary – IBKR Podcasts Ep. 295

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this week’s Market Minute podcast. I’m Andrew Wilkinson. My guest today is Kevin Davitt, Head of Index Options Content at Nasdaq. Welcome back, Kevin. 

Kevin Davitt 

Thank you so much for having me back. I’m doing great. I hope you are as well. 

Andrew Wilkinson 

Yes—for an FOMC conclusion day, I’m doing just fine. At the time of the last meeting in July, Kevin, the FOMC was faced with a three-month average job growth of 150,000 people being added to U.S. non-farm payrolls. But due to revisions and subsequent weakening in the labor market, that three-month average has now dropped to about 29,000 jobs each month. How important is today’s FOMC outcome for the next episode in the stock market? 

Kevin Davitt 

You framed it in a very interesting way around the recent weakness in the labor market. As far as today goes, we’re often inclined to make every Fed meeting seem like the most important one ever. I doubt it. My expectation—just my own—is for a relatively muted reaction, because the market has correctly anticipated Fed moves for years now. I doubt the Fed does something that puts the whole market off sides. If that happened, all bets are off. So my long-winded way of saying: I think today we’ll see a quarter-point cut, and markets will get back to business as usual. Bigger picture, your points about the labor market are well taken. 

Andrew Wilkinson 

I think most people in the market are looking for a 25-basis-point cut. I’m a little bit different—I feel there’s no point in being “just a little.” You can’t be a little bit pregnant. I’m actually thinking they might go for a 50-basis-point cut. Would that seem like panic, or would it be better for the stock market, do you think? 

Kevin Davitt 

I like the way you put that. In this Fed meeting, they’re going to update the dot plot, which they generally do every three months. It’s meaningful because it projects where they see rates a year from now, 18 months from now. If I go back to what the Fed projected in June, the last time they updated the dot plot, their expectation was for a 3.6% Fed funds rate at the end of next year. 

Now, Fed fund futures today are pricing expectations around 2.9%. That’s a significant gap, and it speaks to your question—the market is arguably saying the Fed is a little behind. The market is anticipating the Fed will be more dovish than previously expected, with three more rate cuts, including today, priced in for this year. 

If the Fed’s updated projections don’t move down to reflect that, could that be viewed as a hawkish stance? Possibly. Because, to your point, the labor market is a big deal, and it seems like their attention has shifted—placing more relative importance on the labor market than inflation. And while it’s a bit of a punt, time will tell how that ultimately balances out. 

Andrew Wilkinson 

I’ve got a feeling there’s going to be an “ah-ha” moment after the announcement at two o’clock—“Ah, yes, now that makes sense.” Kevin, you work in the technology space, which is what Nasdaq does. How sensitive do you think technology firms are to the absolute level of interest rates? 

Kevin Davitt 

That’s an interesting question. As a caveat, I’m not an economist—I focus on derivatives. From my perspective, focusing on the Nasdaq-100, which is significantly influenced by technology, I’d argue that broad-based indices across the U.S. and the world are shaped by the fact that the firms driving the markets are now generally tech firms. 

Historically, tech firms were more sensitive to absolute interest rates. But the modern-day Nasdaq-100, the index I help support, is markedly different from a cash-flow perspective than it was 10 or 25 years ago. These are very large-cap companies with gigantic stockpiles of cash on hand, generating revenues that would make most firms blush. 

If you look at Amazon, Apple, and Alphabet—they’re all in the top 10 U.S. companies by revenue. Amazon is behind only Walmart. Beyond that, these firms generally locked in long-term debt during the zero-bound interest rate environment. Not long ago, Apple’s long-term bonds paid roughly the same as U.S. debt at similar maturities. 

So, cheap money tends to be a tailwind for all businesses, but small-cap companies are typically far more levered and therefore more exposed to higher or lower rates. The Nasdaq-100 is anything but small-cap. 

Andrew Wilkinson 

This week we released a podcast with Tyler Wood from the CMT—an excellent technical analyst. I asked him how firm the trends looked from a technical perspective. He felt that everything remained intact, the bull market is still there until it’s not. From a fundamental perspective, do you think the recent slowdown in the labor market suggests the economy is healthy enough to drive the stock market higher, or are we heading toward falling interest rates as a panic move? 

Kevin Davitt 

That’s a really good question. The way you framed it earlier—“technicals are good until they’re not”—is sort of how you could frame the labor market: it’s fine until it isn’t. 

Andrew Wilkinson 

We kind of had one of those moments—as I said at the beginning, 150,000 down to 29,000. All of a sudden something changed. 

Kevin Davitt 

Back to your question, and the fundamental framing: you can make a compelling argument that the labor market is the key going forward, and it seems the Fed agrees. We’ve seen, and I don’t think I’m being hyperbolic here, fairly anemic job creation for much of this year, especially given the large downward revisions to the data. 

From an investment perspective, the markets keep going up. There’s a wealth effect there that the Fed has historically relied on and pointed to. But for most people, there’s no substitute for income—we rely on our paychecks to drive what we do day after day, week after week, and to drive the economy. 

In my opinion, the economy remains on stable ground by most measures now. But if we see consistent negative job growth, my concern would rise pretty quickly. 

Andrew Wilkinson 

Got it. Let’s finish with a question about options volume. Whenever you do a webinar with me, Kevin, you put up an excellent chart about options volume growth and how the industry is doing. It’s been this steady stair climb—options volumes have accelerated over the years. 

Earlier this week, President Trump proposed moving from quarterly to semi-annual earnings reports. Do you think that will have any significant impact on the options market? After all, options are primarily used as a hedge, and you can generally hedge over quarterly earnings. What impact do you think this could have? 

Kevin Davitt 

Good question. That’s actually a topic we bounced around during a team call earlier this week. It’s certainly possible that volumes could wane, because there tends to be a great deal of positioning around what we often call “known unknowns,” and earnings fall into that category. 

Personally, speaking for myself, I like the idea of incentivizing longer-term growth for firms. I’m a bit of a fan of history, and that was one of the ways leading Asian firms grew during the 1970s and ’80s—they had longer-term plans. You could argue that managing toward a three-month reporting cycle disincentivizes that. 

At a top level, I don’t think regulators are going to worry much about what that does to options volumes on any given day. The other thing I’d point out—because I focus on index options—is that there’s no earnings report for the Nasdaq-100 or the Russell. Instead, we have regular updates like jobs reports and CPI—other “known unknowns.” 

So, given the shift in the market and the broad buy-in for options across the board, I doubt it would have a very material impact. But, of course, I could be wrong. 

Andrew Wilkinson 

Thanks for joining me, Kevin. Are you going to go have an FOMC moment? 

Kevin Davitt 

That’s what I do every six weeks, Andrew. We don’t have to tell everyone about that—but yes, I am. 

Andrew Wilkinson 

Alright. Thanks for joining me, and we’ll speak to you soon, Kevin. 

Kevin Davitt 

Sounds great. 

Andrew Wilkinson 

And to the audience, thank you for joining me. Remember to subscribe to this channel wherever you download your podcasts. Bye for now.