🔺 What to do when markets are at an all-time high? Find smart bargains, like these.See Undervalued Stocks

Investors Now See Fed's Shift As Positive

Published 03/28/2022, 10:43 AM
Updated 07/09/2023, 06:31 AM
US500
-
US10YT=X
-
US2US10=RR
-

The primary purpose of my oftentimes meandering market missive is to identify the primary drivers of the near-term market action. As I've stated a time or twenty, I'm of the mind that if I can understand what markets are doing and why staying opinion agnostic in the process, I feel I should have a decent chance at keeping portfolios positioned accordingly.

To be sure, there is no shortage of issues for investors to deal with right now. The war. The Fed. Inflation. Growth expectations. The yield curve. Additional geopolitical issues. Supply chain problems. China. And a little thing called COVID. All of which keep traders on their toes these days. And it is important to recognize that the market's "narrative" (I.E. the street's explanation of why markets are moving the way they are) can/does shift quickly in this environment.

But perhaps the biggest news last week revolved around the apparent pivots from an unlikely pair: Powell and Putin.

Cutting to the chase, Jay Powell got everyone's attention on March 21st when he said:

"We will take the necessary steps to ensure a return to price stability. In particular, we will do so if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings."

Bam. In a heartbeat, markets began to price in the idea that the Fed would "frontload" upcoming rate hikes. Instead of raising rates by 25 basis points at each of the upcoming FOMC meetings, Powell's merry band of central bankers would hike rates by 50 basis points (or more?) at the next couple of meetings. And in short, the Fed is letting us all know that they are now in "inflation-fighting" mode.

This idea was supported by a flurry of Fedspeak, with multiple Fed officials (Bullard, Mester, and Daly) all talking about 50 basis point moves. And the markets responded, with the yield on the 10-year surging from 2.15% to just a smidge under 2.5% last week.

While it may sound strange, the stock market didn't freak out over the Fed donning their inflation fighter capes. No, it appears that investors see the Fed's shift as a positive since:

  1. Stocks have historically been a strong hedge against inflation.
  2. The market has tended to rise during the first year of a tightening cycle.
  3. The economy remains stronger than expected.

Which, of course, is a good thing from an earnings perspective.

Next, we should note that stocks appear to be following the historical script for unsettling geopolitical events. Summing up, my take on the history of these things is that stocks initially experience a short/sharp selloff on the uncertainty caused by the event. But then, the market tends to recover fairly quickly as the focus returns to the economic/macro backdrop. Which, in this case, remains pretty positive.

Speaking of geopolitical events, word out of Russia on Friday suggests that Putin may be making a pivot. As in changing the objective of his unconscionable invasion. Instead of trying to waltz in and take over the entire country while the world watches idly by—a plan that is clearly not going well - on Friday, it sounded like Putin might be looking for a way to "get a win." As in, perhaps "just" taking the eastern sections of Ukraine already occupied by Russian supporting separatists. We shall see.

The good news is the stock market has been movin' on up over the last two weeks and, in the process, has retraced a healthy chunk of the recent decline. The S&P 500 is just 5.5% from its all-time highs as of Friday's close. Given a war, surging inflation, the Fed's pivot, and a spike in interest rates, I think we can say the market is handling things pretty darn well.

Yes, this is a glass-is-half-full assessment. And we must remember that things can/do change quickly and may not go smoothly going forward. But when looking ahead, the key question for me is if persistent/higher inflation and/or Fed policy will cause economic growth to slow. Because from my seat, it's the outlook growth that matters most to the stock market in the end.

Now let's review the "state of the market" through the lens of our market models.

The Big-Picture Market Models

We start with six of our favorite long-term market models. These models are designed to help determine the "state" of the overall markePrimary Cycle Models
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

The Fundamental Backdrop

Next, we review the market's fundamental factors including interest rates, the economy, earnings, inflation, and valuations.Fundamental Factors
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

The State of the Trend

After reviewing the big-picture models and the fundamental backdrop, I like to look at the state of the current trend. This board of indicators is designed to tell us about the overall technical health of the market's trend.

Price Trend Indicators

The State of Internal Momentum

Next, we analyze the momentum indicators/models to determine if there is any "oomph" behind the current move.

Momentum Indicators
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

Early Warning Indicators

Finally, we look at our early warning indicators to gauge the potential for countertrend moves. This batch of indicators is designed to suggest when the table is set for the trend to "go the other way."

Early Warning Indicators
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.