Powell Wins Plaudits For Buy-The-Fact Stock Rally

US equities had their best “Fed day” in more than a year, even as Jerome Powell and colleagues checked virtually every box on the hawkish pivot list.

The S&P’s 1.6% Wednesday gain was the largest of any FOMC session since November of 2020, just after the election (figure below).

“Jay Powell had his best press conference,” Jeff Gundlach declared. Bloomberg turned his tweet into a headline. As though Gundlach’s ad hoc social media review was news.

Remember, the only thing that matters is stocks. Never mind that 10% of the people own 90% of them (stocks). One netizen (who almost surely doesn’t count himself in that 10%) posted a badly Photoshopped TIME magazine cover featuring Powell as Person of the Year. “F–k your puts,” read the caption.

Because market participants always need a narrative to explain the price action, the media resorted to a tried and true technique: The journalistic alchemy that turns subjective assessments into objective facts.

“Bulls took solace in Powell’s robust endorsement of the economy,” Bloomberg said. How do they know? Well, because Bill Dudley told Bloomberg Television that, at least from his perspective, the takeaway from the press conference was Powell’s “pretty upbeat” assessment of the growth outlook.

In fairness, the same linked article picked up on the likely real reason for the rally. Markets de-risked headed into the event.

“The market seemingly is ‘pre-trading’ and de-risking a hawkish Fed,” Nomura’s Charlie McElligott said Wednesday morning, prior to the decision. “Investors are really hedged for downside, with [the] 50-DMA of total US equities put volumes now at all-time highs,” he went on to write, flagging extremes in skew to drive home the point.

If there was a fundamentals-based rationale for the post-meeting equities bid, it was the notion that the Fed will manage to get back out ahead of things and thereby avoid some of the more unpalatable macro outcomes.

“Our read is that it was optimism the Fed will do what’s needed to address inflation and reduce the prospects of a stagflation scenario,” BMO’s Ian Lyngen and Ben Jeffery remarked, adding that “by bringing forward hikes, the FOMC reduces the risk of being too far behind the curve by beginning earlier [and] simultaneously lowers the prospects [of] overshoot[ing] the terminal rate guidance.”

But they too acknowledged that “there was also surely a degree of sell the rumor, buy the fact.”

McElligott put some numbers to what he described as “massive” de-risking over the past several weeks. Nomura’s models suggest vol control de-allocated to the tune of $78 billion in US equities over the past month, while CTAs sold $64 billion of global equities futures and $26 billion of US equities futures over the same period. Hedge funds, meanwhile, “are at low single-digit percentile ranks for both nets- and grosses- on [a] one-year lookback,” Charlie went on to say.

Now, the year’s last major (known) event risk is in the rearview. Effectively, markets started trading the December Fed meeting the day Powell told Congress “transitory” was out as a description of inflation in the US. I’d also (gently) note is that if you endeavor to parse post-Fed price action, you’ll often wind up with more noise than signal.

As for rates, the reaction was somewhat muted, all things considered and notwithstanding the usual chop around the statement and presser. “The back end is where the perceived anomaly is,” ING’s James Knightley and Padhraic Garvey wrote Wednesday. “The long end continues to be held down by net demand for Treasurys, but there is also an implied worry that aggressive Fed hikes can hurt the economy,” they added, noting that they “place a bigger emphasis on the former.”