Bob Elliott, chief investment officer of Unlimited Funds, joins the podcast to discuss his views on the Federal Reserve, inflation, the midterm elections, and why stocks have entered a long ‘slog’ for the foreseeable future.
Content Highlights
Investors have been conditioned for recessions to feature a fast decline in equity markets followed by a rapid recovery. This time around those dynamics are different (3:44);
There is no chance of a ‘Fed pivot’ coming anytime soon (7:58);
What about infighting at the Fed and within the FOMC? (11:03);
Yes, you need unemployment to increase for there to be any progress with inflation. Higher prices are no longer due to supply chain issues (13:57);
The Fed will raise either 50bps or 75bps at its next meeting and rates could easily go up to 6% (21:22);
Background on the guest and his ETF, the Unlimited HFND Multi Strategy Return Tracker ETF. Stock ticker: HFND (26:19);
The growing disconnect between hedge fund positioning and retail investors: Hedge funds are short bonds, long commodities, bullish gold, and are sitting on a bunch of cash… (36:21);
The Fed’s target rate for inflation is 2%, but that could change. That would bring a myriad of issues… (38:24);
It’s hard to get bullish about longterm bonds: right now and for the foreseeable future (40:54);
Investors continue to look for reasons that the economy is slowing and the Fed needs to reverse course. There is virtually no evidence of this happening (42:44);
The midterm elections are likely to lead to a split government. This brings tail risks that few people are talking about (44:50).
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.”
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.
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
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.
