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Fed Pivot Hope-ium Lives, Even Without Much Pivot Proof

Published February 2, 2023

Stocks are rallying even as the Fed sticks to its hawkish tone on interest rates…

The following is an amended version of the Feb. 2 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.

The Federal Reserve yesterday raised interest rates by 25 basis points as expected and didn’t materially change the language in its policy statement, causing a brief dip in stock prices. That promptly gave way to buying even as Jerome Powell didn’t provide anything in the way of Pivot Hope-ium either. At the end of the day stocks had rallied significantly, with tech the major winner. The Nasdaq was up 2% and S&P 500 up 1%.

So much for that set up for a disappointment… Right, well at least we weren’t the only ones making that assessment…

What Dovish Commentary?

It’s hard to find anything particularly dovish about the FOMC statement or Powell’s press conference. No matter. For whatever reasons investors have decided that the Fed is not going to break stuff or hurt the market anymore. That is what yesterday’s (and last month’s) activity tells us at least. How else to explain the massive rally we’ve seen in tech stocks in particular?

Whatever happened to ‘don’t fight the Fed’? Are we missing something here or is this a massive game of denial going on right now? Or maybe the mother of all dead cat bounces?

Maybe Powell’s comment that only “a couple more rate hikes” are needed “to get to that level we think is appropriately restrictive” was enough? Perhaps this removes any uncertainty of further hikes beyond this year from the hearts and minds of investors? But then you have to ignore a ton of hawkish commentary including a line in the policy statement that “ongoing increases in the target range will be appropriate.”

Okay, so maybe investors figure this is all hot air and the Fed is going to be data dependent? Great, but what if the data forces the Fed to hike rather than cut? Is that possibility simply off the table now?

Anyway, RIP Don’t Fight the Fed. Long live Don’t Fight the Tape.

2022

Don't Fight the Med MaryJane meme

2023

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China Reopening: Underestimating the Impact on Global Economy, Markets (Szn 5, Ep. 2)

Published January 24, 2023

With Mike Edwards, Weiss Multi-Strategy Advisers

Mike Edwards, deputy chief investment officer at Weiss Multi-Strategy Advisers, joins the podcast to discuss China’s post-Covid reopening and why its impact on global markets is not being fully priced in by investors.

Content Highlights

  • China’s abrupt U-turn over ‘Zero Covid’ is unquestionably one of the biggest changes to take effect in the global economy over the last few months (2:23);
  • There have been reservations about this reopening, but it is happening with authoritative force and will have a major positive impact (5:08);
  • What about the US de-coupling from China and the embattled real estate sector? (11:00)
  • Where this will be felt most is in markets that have exposure to the Chinese consumer. It also points to Europe and emerging markets outperforming the US (17:54);
  • Chinese consumers were far more restrained than their US counterparts during Covid and have been slower to return — especially tourists. This is not just a one-off in terms of the resurgence of Chinese travel and services (24:20);
  • What to make of the latest economic developments in the US, especially with the consumer? (27:31);
  • Weiss’s house view is that the US will avoid recession this year (34:02);
  • Background on the guest (37:49);
  • China can re-emerge without the US as a major partner (51:36);
  • After some consolidation, the US economic and market cycle is marked by investors seeking to put money to work — slowly (57:18).

More on Mike Edwards

Not investment advice!

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Cyclical Stocks to Outperform as Inflation Drops to 3.5%: Barry Knapp’s 2023 Outlook (Szn 5, Ep. 1)

Published January 9, 2023

Barry Knapp of Ironsides Macroeconomics rejoins the podcast to discuss his surprisingly sanguine view of the economy in 2023: Why cyclical stocks should outperform the technology and defensive sectors, and why he’s expecting inflation to drop to 3.5% by the second half of the year.

Content Highlights

  • Inflationary recessions are different from deflationary ones. The last four were the latter. If there is a recession this year, it will be the former (02:18);
  • Earnings downside is limited in this scenario, by 5% based on what happened in similar situations in the past, and earnings should actually go up (5:56);
  • Tech margins should continue to be under pressure but economically-sensitive cyclical stocks should see margin expansion (10:50);
  • The US labor market has actually started to weaken considerably — and not due to Fed policy (12:18);
  • There have been some big adjustments in the labor market post-pandemic (16:47);
  • The ‘wealth destruction effect’ from tech stocks selling off is negligible (27:35);
  • One point of concern: the deficit. This is where the implosion in wealth could affect things (32:59);
  • The coming budget battle in Congress is worth paying attention to (34:41);
  • The ‘higher for longer’ Fed interest rate hike thesis has gained traction. What this means for stocks (43:27);
  • Inflation: Expect 3.5% CPI by mid-year (47:37).

More Information About the Guest

Not intended as investment advice!

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MoreCyclical Stocks to Outperform as Inflation Drops to 3.5%: Barry Knapp’s 2023 Outlook (Szn 5, Ep. 1)
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