Federal Reserve – Page 12 – The Contrarian Investor Podcast

Powell: Hope for a ‘Fed Pivot’ at Your Peril

Published November 3, 2022

The following is an amended version of the Nov. 3 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 cratered yesterday after comments from Federal Reserve Chair Jerome Powell that dashed hopes of a ‘Fed pivot.’ It was at least the second time this year that Powell has popped the ‘hopeium’ bubble; at Jackson Hole in August, his succinct speech caused a similar sell-off.

Weirdly, this month’s Federal Open Market Committee meeting got off to a bullish start. The Fed raised interest rates by 75 basis points as expected, but added new language to the policy statement, that it would take into account “cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Jerome Powell quote: "It is very premature to be thinking about pausing" — Source: Author via IMGflip.com

Investors initially took this wordy statement as the long-awaited ‘pivot’ signal and bid up stocks. That lasted for about an hour until about halfway through Powell’s ensuing press conference when he announced it was “very premature to be thinking” about pausing rate hikes.

“People when they hear ‘lags’ think about a pause,” Powell said, an apparent direct reference to the new sentence in the policy statement. “It is very premature, in my view, to think about or be talking about pausing our rate hikes,“ he added. “We have a ways to go.”

Hopeium: A Helluva Drug

Investors have been playing a game of chicken with the Fed for some time, periodically acting like a pivot is imminent despite (let’s face it) little evidence. It seems whenever these hopes get too pronounced and stocks start rallying for real that Jay Powell comes out and dashes all hopes. That was certainly the story at Jackson Hole. The scene repeated itself yesterday.

Will investors learn from this? Will they now take Powell by his word that things need to ‘break’ in the economy before there can be any progress on inflation?

Probably pretty unlikely.

At least we now know exactly how the scene will unfold: Some dovish Fed officials will make public comments about pivoting or ‘stepping down’ and the market will rally. It will be helped along by commentary from ‘Fed watchers’ on the sell side (or in asset management. Cough, Blackrock). The rally will intensify, then Powell will come out and kill it again.

The only way we can realistically hope for a Fed pivot is if inflation starts to ease. That isn’t happening yet. Nobody knows when it will. Most guesses on this have so far proved wide of the mark. A reminder to watch the data, not the commentary.

Tech is Dreck, SPY is Fly

Published October 28, 2022

The following is an amended version of the Oct. 28 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

It’s been a brutal week for tech stocks. Disappointing earnings from Google (GOOG), Facebook né Meta (META), and finally Amazon (AMZN) sunk those stocks to levels not seen in years. In the case of Meta, you have to go back to late 2015. In Amazon’s, 2018.

For whatever reason this did not hit other parts of the market as the Dow Industrial Average rose for the fifth straight day on Thursday and is on track for a 4% gain for the week. The S&P 500 (SPY) is looking at a gain of 2%. Red October? The Dow is due for its largest monthly percentage gain since January 1987. (The Dow’s gains have been more dramatic than the SPY, but “Dow” didn’t rhyme with “fly” or any other cool word I could come up with).

Why Just Tech Stocks?

What to make of the tech earnings? Amazon and Google were probably the most worrisome, as both lowered their outlooks. On paper, that doesn’t speak well to the B2B sector (ad spending in Google’s case) or consumer spending in Amazon’s. We’ve said for some time that the US consumer is one of the last things holding up the global economy. If Amazon thinks Americans are going to buy less stuff, especially during the holiday season, then that can’t bode well.

So why has this the sell-off been limited to tech stocks? Investors could be short-sighted or maybe the lack of panic is perfectly justified. For one, none of this means consumers are reining in spending. Remember that Amazon’s online sales are still expected to grow on a year-over-year basis, just by less than previously anticipated. The company has been losing some business to in-person retail all year. This isn’t 2020 and we aren’t forced to order everything online for home delivery. Consumers have returned to shopping in stores as Covid fears have abated.

Google’s ad spend concerns may be due more to a secular move away from web-based search. Most of the action is on social media platforms nowadays (maybe not Facebook anymore, but TikTok etc) so it would make some sense for Google to be losing market share here.

Zuck’s Mad Gamble

Mark Zuckerberg whiteboard inscription: "Maybe having a tone-deaf sociopath with absolute control leading your company is not such a good thing?" — Not an actual quote

As for Meta/Facebook, those issues appear to be company-specific. It turns out that having a tone deaf sociopath with absolute control leading the company is not always a good thing. Maybe a lesson for Twitter (TWTR), though unlike META Twitter has never really found much favor with investors. Also, for all of Elon Musk’s flaws there are no reports that he is going to turn Twitter into a multi-billion dollar gamble on the metaverse (whatever that is).

Tech may be dreck again (or maybe just big tech) but that doesn’t mean the consumer is slowing. Nor should it detract from the solid business other companies are doing. Most earnings have been positive and many companies have even raised outlooks. So it makes sense that those parts of the market are moving higher.

Enter the Fed

There is now renewed talk that next week’s FOMC meeting will include ‘pivot language’. This talk may in fact be helping risk appetite going back to last week. It may also be hopelessly naive as the Fed simply can’t risk having inflation continue to run wild. Yeah there may be political pressure on the Fed to stop with the rate hikes, but if inflation keeps running rampant the fallout will be far worse for the Fed and the economy alike.

This is very much next week’s story. For now enjoy the latest rotation out of tech stocks. It stands to reason that this could persist for all the reasons mentioned. The good news is this alone does not definitively portend bad things for other parts of the market. Whether that set-up is constructive for further risk-taking is an entirely different question of course.

What to Make of the Latest Hope of a Fed Pivot

Published October 24, 2022

The following is an amended version of the Oct. 24 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

Stocks had another big rally on Friday to conclude their best week since June and first three-week winning streak of the year. Major US indexes were all up multiple percent on the day. The apparent catalyst was a Wall Street Journal story that the Fed officials are “signaling greater unease with big rate hikes.”

Fed pivot injection meme — Source: Author via IMGflip

The Fed appears to have coordinated this latest injection of hopeium. San Francisco Fed President Mary Daly had the most succinct comments on Friday, saying “the time is now to start planning for stepping down.” The talk is that there will be another 75bps rate hike at the Fed’s next meeting and then 50bps in December.

Markets have taken all this as a clear sign that the Fed is indeed going to blink and back off of raising rates aggressively for much longer. There may be good reason to suspect the Fed will indeed go this route as there are indications that things are starting to break in the global economy. The UK is the main illustration for this.

The market may very well be correct in this assessment this time, but we’ve seen this movie before. The fact remains that with inflation high it is going to be very difficult for the Fed to justify moving to a neutral interest rate policy. When things do break it will very likely get ugly. It always does. That will bring inflation down for sure — along with create a bunch of other effects we haven’t begun to see in the US yet.

So yeah, Fed officials may be getting scared of the monster they have created (which interestingly was done to fight another, earlier monster of the same Fed’s creation). Doesn’t mean they’ll be able to do anything. Talk is cheap. We’ll see at the Fed meeting next week whether this goes anywhere. In the meantime we’ll get a fresh inflation reading on Friday with the PCE deflator.

Tag: Federal Reserve