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Bears Driven To Brink Of Extinction As Powell Promises Rate Cuts
"When we do get that confidence -- and we're not far from it -- it'll be appropriate to begin to dial back the level of restriction."
So said Jerome Powell on Thursday during a second day of testimony on Capitol Hill. "That confidence" was obviously a reference to the level of conviction among Fed officials around the notion that inflation is indeed on a sustained path back to target. Powell's timeline -- "not far from it" -- was fuel on the fire for an equity melt-up that's now in its fifth mo
I think the Fed chair is well aware of what is happening in markets, but he also knows the results of Super Tuesday and witnessed Mnuchin’s last hour intervention to save NYCB, the rate cuts are coming, any re acceleration in inflation will be 2025 fight
Really interesting. Powell didn’t need to be so definitive and committal, he chose to be, and he knew what the reaction would be, so hard to escape the conclusion that he wanted that reaction. Given the other recent Fedspeak, the sense I get is that Powell was pushing any recalcitrants on the FOMC to a future action. Come late summer, is the FOMC going to withhold rate cuts and send the market tumbling into the final months before an election which, I’m convinced, most of the members would like to go a certain way?
What are the implications? Other than stay longer, get longer, or start drinking heavily?
Well, inflation now has a longer leash to run on. I don’t know a lot of “focused” ways to play higher-for-longer inflation via stocks, but maybe we can think of some. Could probably do worse than simply buy cyclicals and, dare we breathe the word, small caps. Also financial companies that directly benefit from higher-for-longer rates.
I agree that this was curiously definitive, notwithstanding the usual data-dependent caveat. Other than NYCB wobbling, there doesn’t seem to be that much stress (or at least concern about that stress) in the market that needed boosting or reassurance at the moment. Feels a little like spinning your tires and wearing out the treads before the green flag is waved.
There is a narrative out there that Powell/Yellen are engineering a rocket ship to give Biden the biggest possible boost, or at least direct serious headwinds toward the alternative. Some feel that Thursday’s testimony all but confirmed it. But the contrarian in me is left to wonder if someone convinced Powell the election is in May. It’s still a long way until November. Maybe he’ll be forced to start cutting rates when the S&P drops 500 points in a day? (Albeit after sprialing up to 6500 — sounds crazy but half of the Magnificent 7 still have some catching up to do).
All that said, I’ve been watching some upsloping charts get steeper and steeper, with a certain anxiety. Let winners run, sure, but at ludicrous X sales, if the model feels even a little tight for next quarter’s required big beat and generous raise, pulling off the last several months’ gains to recycle into something else looks better and better. If we’re in an “everything rally” and a broadening market, there are other names that just recently stepped onto the escalator.
And we are indeed in an “everything rally”. RSP and IWM charts have matched SPY charts since around 3Q or 4Q.
But SPY is at record high PS and PE; RSP and IWM are not. So do you want to chase SPY to new record expensiveness?
Probably you have to, with part of the portfolio. But we know SPY is dominated by the Magnificent 7. Three of the Magnificent 7 have plainly rolling-over looking charts. So with the rest of the portfolio, perhaps buying RSP or IWM (or selected names outside the Seven) at non-record expensiveness bears considering.
“Bears” as in “should be considered”, not as in “bearish”. Being bearish now is too hazardous to one’s health. Don’t fight the Fed etc etc.
Lawrence Fuller (on Seeking Alpha) has been writing a lot about RSP/IWM vs. SPY since January. I want to like this idea, however, it is hard to ignore that the “everyman” continues to blindly buy SPY via automated bi-monthly purchases into their 401-k plans.
I am being picky in choosing a few individual small and medium caps, that are very profitable and have manageable debt levels, over indexes.
Probably more trivial than meaningful…for the greybeards among us, Nasdaq topped on March 10, 2000 (S&P 2 weeks later), and the market bottomed from the GFC on March 9, 2009. Kind of curious where Bank of America’s greed fear index is now…in case anyone thinks the boat is a bit heavy on one side.
LOL: ” ‘a bit unhealthy’ “. Maybe.
It’s actually fascinating to watch and speculate about if/when something will break. The structure’s changed from 2000 and ’08-’09. Yesterday I did see the Qs’ bid-ask jump around wildly and w/ some unusual space b/n them when it pulled back intraday; reminded me of past debacles. It’ll be ugly and scary as heck when the waves start rolling over, but maybe Powell and Yellin can keep it aloft into 2028 election season. Today I could almost hear traders at all levels saying to each other, “Why would it go down?” Election year, Fed will backstop banks w/ more liquidity, etc., etc.
Thanks for the great work H across multiple realms.
Normally, I’d be bearish by now, but I still think there is too much momentum in generative AI. We’ve already seen the mega-rally in the hardware makers for AI, but we’re about to enter the phase where the software makers will start to rally.
Salesforce sticks out to me as being on the verge of a big rally. They just released two AI features that will allow companies to start using their own internal data in a much more efficient way. I expect a lot of companies will be upgrading their Salesforce subscription to add the new copilot and prompt builder features. Generative AI built on top of a company’s internal data will be a big unlock for productivity and insights, and Salesforce already has a ton of internal data in their core platform. However, the real cherry on top is the Slack acquisition which is about to make a lot more sense.
More broadly, generative AI is going to give SaaS company’s a new lever to get back some of the pricing power they lost over the last two years.
The “hardware for LLM training” trade is a year+ old now. The next trades include “monetizable LLM applications”, “hardware for LLM inference”, and “defense against LLM misuse”. I certainly hope CRM catches the apps trade; it’s one of my horses.
Cue the image of the family road trip:
“Dad, how much longer?”
…”About 10 more minutes”
(a few minutes later…)
“Dad, how much longer?”
…”About 10 more minutes”
Powell/the Fed have realized they don’t actually have to cut the spot rate, they only have to suggest they’ll cut the spot rate soon to materially reduce interest rates up the curve and to positively boost asset prices.
I expect they’ll keep doing this for as long as they can, and won’t do more than one 25 bps rate cut (say around June or July of 2024) until they absolutely have to (i.e. after some combination of negative job growth and negative consumer spending growth)