Stocks haven’t stopped dropping since the December FOMC meeting. But nothing about Fed policy has changed….
The following is an amended version of the Dec. 16 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack or Supercast.
Stocks sold off dramatically yesterday with the Nasdaq dropping more than 3% and S&P 500 down 2.5%. Today the selling appears to be continuing, and perhaps event intensifying a bit. That would make for three straight days of losses dating to Wednesday’s Federal Open Market Committee meeting.
One can’t help but think that all this risk-off is a bit of an overreaction. Nothing about official Fed policy changed, we just had Fed officials increase their expectations of interest rates for next year. That means nothing. These views are not binding. They are not tied to them in any way and can be expected to adjust them when and if the data changes. You know, exactly like they did this year.
If one is bullishly inclined, then one would probably want to take this opportunity to add to one’s positions or perhaps even take out more exposure to risk assets. There has not been any new data to undermine the ’soft landing’ thesis this week — in fact quite the opposite, with Tuesday’s CPI coming in softer than anticipated and showing that inflation is clearly on a downward trend.
Caution Advisory
Make no mistake: There are multiple reasons to be concerned about the economy and the Fed next year and what that would mean for risk assets. We have talked about those ad nauseum for months. If this narrative begins to win over the hearts and minds of investors, then the data won’t matter anyway. Markets are irrational beasts and once fear takes hold it tends to drown out anything else anyway. Plus, we all know markets can stay irrational longer than we can stay solvent.
But from the looks of it, this has the making of a classic overreaction for the simple reason that no underlying data has changed. If anything, the dot plots are contrarian indicators as Fed officials tend to change their views more frequently than they stick to them.
Our YouTube channel has a short clip from today’s podcast if you care to listen to it.
Nothing here is intended as investment advice. Do your own research. Make your own decisions.