Making good decisions and sticking with them for a long time is a recipe for investment success. Short-term indicators discussed in this email may create an illusion that timing the market is simple. It is not. Anything can happen in markets.
“We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”
These infamous sentences were shared by Fed Chair Jerome Powell at a press conference on June 24th, 2020. At that time, the stock market bounce was fading. Powell’s goal was to convince dubious investors that the Fed was serious about supporting the markets and the economy no matter what.
Powell is struggling to convince investors again. In 2022, his goal is to bring down confidence. In August, the market was rising with expectations of a Fed “pivot.” Powell emphasized the Fed’s resolve to keep raising rates. Stocks fell 3.5% from the high of the day. This pattern repeated itself two more times in just the last three months with drops of 3.2% and 3.5%. (These are all one-day drops, which makes these some of the most brutal days of the year.)
The Fed Chair will give a public speech again on Wednesday, December 2nd, and the importance cannot be overstated. It’s going to be the biggest thing on Wall Street since the last time Powell spoke. Only PCE inflation on December 1st and CPI inflation on December 13th come close. With these inflation reports, investors interpret the meaning. When Powell steps up to the mic, he interprets for us. Just like the last three times, stocks are rising in anticipation of a “pivot.”
Market Analysis
My commentary last week focused on the reliability of sentiment indicators. Nothing has changed. Expectations are too high, and allocations are too aggressive in U.S. stocks. These and two other key signals are currently signaling that momentum for stocks could turn any day. This is not a good time to be aggressively optimistic. Unless we get a positive surprise from PCE inflation this week, it is possible that we reached a short-term top last week.
Don’t Fight the Fed
Let’s turn to economic fundamentals. Right now, the market expects the Fed to move rates up 0.5% in December, followed by three hikes of 0.25%. In addition, the Fed is pulling money from the markets every month (known as quantitative tightening).
All this aims to bring inflation down by lowering consumer confidence and spending. The Fed has the tools. The question this week is, “Does the Fed still feel the same as it did three weeks ago?” Powell will answer that this week. When he does, we all should remember the investing mantra: “Don’t fight the Fed.”
