Last updated on August 15, 2022
The following is an amended form of the Daily Contrarian briefing from July 20. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.
Stocks put in a major rally yesterday. The Nasdaq gained more than 3% on the day and S&P 500 was up 2.8%.
The bounce is being attributed to earnings, but most of these were not that great and several companies also scaled back their outlook for the rest of the year. Then there was Netflix (NFLX), which rallied after hours despite announcing a loss of almost 1 million subscribers. The stock rallied because it had previously predicted a loss of 2 million. (Note to streaming companies: Just predict a huge loss of subscribers, more than twice what is likely then sit back and watch your stock rally).
Remember that markets hate uncertainty more than they hate bad news. The Federal Open Market Committee, or FOMC, meets next week to decide on interest rates. Talks of a 1% rate hike that spooked markets after last week’s inflation reading have given way to the far more likely reality of a 0.75% hike — and that is now being accepted as gospel. The source for this appears to be a speech by Fed governor Chris Waller, which has led the Wall Street Journal to all but declare the 1% hike to be off the table.
The WSJ has a good track record here, as they correctly predicted the 0.75% rate hike in June. Perhaps they are knowingly leaking this stuff or maybe there is another explanation. Kenny Polcari on Twitter has more of a sinister look at how this all may have gone down. The point is, now that we have certainty around next week’s Fed rate hike. It may just be perceived certainty, but as far as markets are concerned, the 1% hike is off the table.
Whatever caused the rally — whether it was indeed earnings or certainty around the Fed — it’s been a welcome surprise. This week was supposed to be quiet ahead of next week’s FOMC interest rate decision. Instead it almost looks like the good ol’ days are back. Just look at cryptos! Probably a good time to get contrarian here and remember that the Fed is still removing liquidity from the system, that the housing market is definitely cooling, and that it stands to reason that the employment market will soon turn — and the economy with it.