NOT OUT OF THE WOODS YET… Investors Can’t See the Forest for the Trees!
More and more, the markets are looking for a sign – any sign at all – that the Federal Reserve is ready to back off of its aggressive course of interest rate hikes. Investors are so desperate that they’ll interpret just about anything the Fed says, or even what they didn’t say, as a green light to start buying equities again.
A case in point would be the head-fake of July and early August when the market mistakenly construed Jerome Powell as ready to pivot or at least pause. That rally’s gains have already been coughed up, and the June lows are likely to be tested again as we approach the November 1-2 FOMC meeting.
Granted, we did get a decent-sized rebound last week in the stock market. This wasn’t due to anything Powell said or did since we’re currently in a silent period for the Fed. However, this doesn’t mean that someone else can’t deliver messages on the central bank’s behalf.
More specifically, the Wall Street Journal published an article written by the so-called “Fed Whisperer,” Nick Timiraos. In the article, Timiraos created a verbal pastiche of dovish-sounding snippets from various Federal Reserve officials.
Investors took this as a cue to get back into the stock market, but perhaps they didn’t actually read the full article. In it, Timiraos cautions that persistent wage growth could lead to higher-than-anticipated inflation in the services sector.
To quote Minneapolis Fed President Neel Kashkari, “The problem for me with trying to say, ‘Hey, it’s time to pause,’ is we’re not even sure that we’ve got rates high enough to push services inflation down.” It’s clear that not every Federal Reserve official is ready to back down.
Nonetheless, eager traders pushed share prices higher last week under the assumption that the market is out of the proverbial woods. So far, though, Powell has given no indication that he’s planning to flip dovish – or even data-dependent for that matter.
Plus, we’re about to get into the most intense weeks of the earnings cycle. By and large, corporate earnings reports haven’t properly priced in the impact of inflation and interest rate hikes, which tend to discourage lending, borrowing, and purchasing activity.
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Much of what happened last week can also be explained as short position covering. That’s a short-term factor, though, and shouldn’t have a lasting impact because the weighing machine of the stock market will have to come to terms with a Fed-induced slowdown in the broader economy.
Blindly bullish investors either aren’t aware or just don’t fully appreciate the fact that the Federal Reserve is raising interest rates faster now than it has ever done before. Previous earnings reports, and the market in general, haven’t really priced in the inevitable impact of such a policy shift.
And what a shift it’s been, as so many traders have already forgotten that interest rates were basically at zero not too long ago. Then came COVID-19 and all hell broke loose, prompting a regime of accommodative monetary policy that was, as many have said before me, “unprecedented.”
There is no precedent for what Powell has to do now except perhaps Paul Volcker’s extreme interest rate hikes during the early 1980s – which, if you’re old enough to recall, prompted a painful economic recession.
There was prosperity in America afterward, but reversing the hyperinflationary impact of billions of dollars of government spending is no easy task. There will be more consequences, of which the market has only been given a preview – and be assured that there’s no happy ending to this tragic story.
Chief Editor, CrushTheStreet.com
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