Where’s The Powell Put? $1.1 Trillion Answers

We all know the vaunted “Fed put” is struck far lower than it was before US inflation accelerated to the highest levels in a generation, prompting bipartisan concern and sending consumer sentiment to the lowest levels in a decade.

No longer does the Fed have cover to pursue a market-friendly policy bent in the name of warding off disinflation. Plausible deniability vis-à-vis what critics charge is the Committee’s shadow stock mandate evaporated under the heat of CPI at high noon.

The undeniable link between Joe Biden’s approval rating and surging consumer prices (figure below) means that for once, the White House isn’t opposed to restrictive monetary policy as long as the Fed endeavors to avoid tightening the economy into recession.

Once thing’s certain: The administration surely views inflation as a bigger political liability right now than a prospective 20% drawdown on the S&P.

So, where’s the “Fed put” struck these days? Nobody knows. The Fed doesn’t know either. All else is never equal. A stock selloff that spills over into credit is something entirely different from one that doesn’t. And financial conditions are still among the easiest in recorded history.

At the same time, the rally in equities accounted for the lion’s share of the FCI easing impulse post-pandemic (figure on the left, below).

And Main Street (here defined in very general terms) is more levered to Wall Street than ever (figure on the right).

In short: It’s not as simple as rolling out that old adage about stocks not being the economy and vice versa. In practice, that adage simply isn’t true, even if it’s most assuredly correct in spirit.

The point is, at some SPX level, the Fed would step in. Not BoJ-style, with ETF buying, of course. But rather with verbal intervention, gentle at first and then, if necessary, assurances that a hypothetical equity rout which manifests in outcomes with the potential to undermine growth would be taken into consideration when it comes to the pace of rate hikes and balance sheet runoff.

So, again: What’s the level? Smarter folks than myself (e.g., Deutsche Bank’s Aleksandar Kocic) have endeavored to answer that question. But if you’re interested in the crowd-sourced guess, the February vintage of BofA’s Global Fund Manager survey found 363 panelists representing a combined $1.1 trillion in AUM pinpointing the magic level at 3,700 SPX (figure on the left, below). That’s “just” 17% from Tuesday’s levels.

Apparently, just 30% of respondents think the Powell put will be triggered in 2022, because only three in 10 expects a bear market (figure on the right). Technically, there’s some room for interpretation given equities are well off record highs, so we could get to a bear market without hitting the 3,700 strike. But that’s too much math considering the BofA poll is purely anecdotal.

Although the survey was bearish, on balance, there was little sign to suggest fund managers believe any kind of real reckoning (so to speak) is on the horizon. Risk appetite retreated, cash levels rose and geopolitical angst increased for obvious reasons.

But the S&P still ranked third on the list of assets most likely to produce the best returns in 2022. Emerging market stocks kept the top spot for a second consecutive month, while Bitcoin stayed at number four. Virtually no one said T-bills.

I suppose all I’d note is that the last time the Fed decided to pursue double-barreled tightening, USD cash ended up being the best-performing traditional asset on the planet.