Ever since the 2009 financial crisis, the United States has been in a liquidity-driven bull market unrivaled at any time in the past 100 years. And during that time at every attempt by the Federal Reserve to normalize monetary policy, the markets reacted with what amounts to a toddler’s tantrum. And like a weak-kneed parent, the Fed quickly relented and continued its high-risk policies of negative rates (vs. inflation) and QE money printing. In the short run, it really didn’t affect inflation prospects, or so it was thought by many until it was too obvious and staring everyone in the face.
Monetary policy continues to be more than accommodative, even with the end of QE money printing. Inflation is running at 40-year highs with the stated CPI at 7.9% year over year, and the PPI running at 10% an all-time high. Given that the cost of money (fed funds .25%-.50%) is way below those levels the fed continues to be highly accommodative and assuredly inflationary. If the rate of inflation were calculated as it was in the early 1980s those levels would be far higher, 15% plus.
This past Monday the chairman of the Federal Reserve, Jerome Powell, stated that inflation was much too high and that the normal size of interest rate adjustments at each FOMC meeting may require a potential policy change from the current 25 basis point hike at each meeting to 50 basis points. That would change a lot of econometric modeling in the banking system and for Wall Street securities dealers and their clients.
The market pulled back on that news, then shrugged and moved higher the next day.
What the Fed risks is raising rates into an energy price hike induced recession that may present itself just around the corner. As most know, energy costs are a heavy influence on the economy in general, but more specifically consumer discretionary spending. For low-income and middle-class families, it has been a gut punch, crimping budgets. For a good deal of the country commuting in a personal vehicle is not a luxury but a necessity, not to mention the cost of home heating oil. This means retailers will see greater effects of these higher costs on their customer base and their subsequently reduced spending.
Readers of this weekly note know that we had anticipated that the month of March would likely be flat to down for the S&P 500. Given the recent rally after the FOMC meeting this past week that eventuality is looking less likely. As we stated in last week’s note the oversold condition of the market was such that if peace were to break out the market would exhibit a ripper of a rally. It turned out just a robust defense by Ukraine and an FOMC meeting was enough to spark the rally.
What we anticipated as a high on March 15th for a turn lower in the S&P came in as a low on the 14th (an inversion). The fact that the 10-day moving average on the CNN Fear/Greed index (17.7 Extreme Fear) going into that date, we should have known better. The oversold condition of the market was ripe for a reversion to the mean trade. The pain trade was to the upside.
Deeply oversold former high-flyers such as the major China-related internet services stocks had spectacular one-day performances off the bottom. Eye-popping in percentage terms, but on the charts not so much as compared to the previous carnage.
The next turn date we anticipate for the S&P is the 28th. Originally, we had modeled a low. It may turn out to be a high based on this nascent bear market rally. Stay wary and stay safe.
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