Title: Powell’s Message to Investors: Are You Feeling Lucky, Punk?
Introduction:
The recent rally in the S&P 500 following the Federal Reserve’s statements has left many investors scratching their heads. While it may appear that the broader market has rallied, a closer look reveals that only the usual mega-cap suspects have seen significant gains. This article explores the two possible interpretations of the Fed’s statements and emphasizes the importance of taking them at their word. It also delves into the potential implications of the Fed’s plan to raise rates and highlights the risks associated with buying shares in such an environment.
1. Two Interpretations of the Fed’s Statements:
a. Trusting the Fed: The first interpretation involves taking the Fed’s word that two more rate hikes are likely and that unemployment will rise as a result. This aligns with the Fed’s objective of eradicating high inflation and returning to the 2% annual inflation target.
b. The Fed is Bluffing: The second interpretation assumes that the Fed is bluffing and has actually completed the rate hike cycle. However, considering Federal Reserve Chairman Jerome Powell’s track record of honesty and their consistent focus on combating inflation, this seems unlikely.
2. Powell’s Objective: Eradicating High Inflation:
a. Slowing Down the Economy: The Fed aims to reduce demand by slowing down the economy to control inflation. However, with full employment and strong job prospects, it becomes difficult to achieve lower demand.
b. Increasing Unemployment: The Fed anticipates a 1% increase in the unemployment rate to further combat inflation. However, historical data suggests that once unemployment rises, it usually continues to increase, potentially leading to a recession and lower stock prices.
3. The Fragility of the Rally:
a. Dominance of Mega-Cap Stocks: The rally in the S&P 500 seems deceptive as it is primarily driven by mega-cap stocks, while mid-caps and small-caps have actually declined.
b. Lack of Breadth: The lack of participation from a wide range of stocks undermines the substance and sustainability of the rally.
c. Defensive Sectors Outperforming: The current top-performing sectors are defensive, suggesting risk-averse market conditions rather than the overhyped bull market narrative.
4. Be Cautious and Balanced:
a. Trading Plan: Given the conflicting fundamental outlook and price action, a balanced approach is advisable. Being 50% invested allows for shifting positions lower if a recession hits, while keeping the portfolio open to turning more bullish if the fundamental picture improves.
b. The Mania and Bubble Phenomenon: Despite the bearish fundamental outlook, shares can continue to rise due to mania and bubble-like behavior in the market. As the famous quote goes, “Markets can stay irrational longer than you can stay solvent.”
Conclusion:
Investors should carefully consider the Fed’s statements and take them at face value. The rally in the S&P 500 may seem promising, but deeper analysis reveals its lack of breadth and dependence on mega-cap stocks. While the Fed’s objective is to combat inflation, their plan to raise rates could potentially lead to an increase in unemployment and future recession. By maintaining a balanced trading plan and being cautious in the current market environment, investors can navigate uncertain times more effectively.
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The “apparent” post-Fed rally for the S&P 500 is certainly a head scratcher. This is because, as we dig below the surface, the broader market hasn’t really rallied… just the usual suspects in the mega-cap space. When dissecting the Federal Reserve’s statements, there is a big split in interpretation. a rational one. And one on the brink of madness. To make sense of all 43-year investment veteran Steve Reitmeister stock update below, market outlook and trading plan…
There are only 2 possible ways to interpret Wednesday’s Fed statements.
First, take the Fed’s word for it that 2 more hikes are probably on the way and unemployment will rise because of those efforts.
Second, assume that they are bluffing and that they are actually done with the rate hike cycle.
Now let me ask you… Does President Powell seem like the braggart type? Or does he look like an Eagle Scout who has told the truth every time he’s opened his mouth since he was born?
Hopefully the answer is obvious enough. The Fed is not lying. Which explains why the CME FedWatch Tool has risen to show a 74% probability of a rate hike at its next meeting in late July.
More specifically, the Fed has consistently declared that high inflation is an economic disease that hurts growth and jobs in the long run. Therefore, their objective is to completely eradicate it and return to the annual inflation target of 2%.
His method to eradicate it is “lower demand” by slowing down the economy. It’s hard to reduce demand if you have full employment and everyone’s wallet is full.
That’s why, time and time again, Powell’s press conference talks about the jobs outlook being too strong, leading to sticky wage inflation.
Adding these concepts together, it is CLEAR that they will keep rates high until they have actually caused an increase in unemployment. That’s why they still anticipate a 1% increase in the unemployment rate before it’s all said and done.
Now let me put it another way.
They WANT unemployment to rise to put one last nail in the coffin of high inflation. That’s why so many commentators say they will keep rates high until “something breaks“.
That’s why you have to take them at their word that…
- There is more work to be done to control inflation
- 2 more rate hikes likely this year
- Lower rates will NOT occur in 2023
- And yes, unemployment will rise 1%…or more!
Here’s the real wake up call folks.
The unemployment rate has never gone up 1% and stopped there. Research shows that once it goes up that much, it usually leads to a 2% or more increase. Sort of like opening Pandora’s Box, greatly increasing the odds of a future recession (and deeper bear market).
Are you feeling lucky, punk?
To the market bulls I repeat Dirty Harry’s point-blank question “Feeling lucky, punk?”
In that infamous scene, Dirty Harry (Clint Eastwood) has fired several shots to stop a fleeing criminal. And now she’s standing over him with a gun pointed at his head with one of the best monologues of all time.
In the midst of all the frenetic activity, Harry isn’t sure if he fired 5 shots or the full 6 on the gun. He therefore asks the guy if he feels lucky to know if the gun is empty and if he should try to flee the scene. Of course, the criminal was right to turn himself in because the risk of getting his head blown off was too high.
Yes, the Fed has fired many rate-hike bullets into the economy. So when they tell you that they will probably shoot twice as many… and that will probably lead to an increase in unemployment… and history shows that that comes hand in hand with recessions… and recessions go hand in hand with lower stock prices… THEN you feel “crazy straitjacket” to continue buying shares at this time.
Another rally that was not a rally
At first glance it seems that investors interpreted the Fed meeting as a green flag for the bull market. However, as we delved deeper, we discovered that it was more of the same craziness from earlier this year. Just all the money goes to the usual suspects in the Mega Cap space.
This is why King Bond, Jeffrey Gundlach, said on CNBC that we are seeing a manic-style bubble in mega-caps because of the excitement over AI. But given the current valuation of the overall stock market, bonds are a much better value right now given the tremendous increase in yields. And yes, that stock prices should fall. His analysis is absolutely, historically and objectively true.
So as we dig below the surface, we find that mid-caps and small-caps are actually down since the Fed’s announcement on Wednesday afternoon. Not recovering with the S&P 500 dominated by mega-caps.
Which means there is NO breadth… and therefore not much real substance to the rally. With that in mind, now take a look at this chart from Friday of the top performing sectors:
Look at the 4 main sectors. Those are defensive groups, which means risk-free market conditions. Not the bull market that is being overhyped in media circles.
Can shares continue to rise in light of these facts?
Unfortunately yes. That is the very nature of mania and bubbles, reminiscent of the famous quote from legendary economist John Maynard Keynes:
“Markets can stay irrational longer than you can stay solvent.”
trading plan
Taking all of the above into account, this is why my trading plan remains balanced. As in 50% invested.
That is the best way to cross the bearish fundamental outlook against the bullish price action. (However, as previously shared, the price action isn’t quite as bullish as it seems given that not enough stocks actually participate in the good times…just the usual suspects in the mega-cap space.)
This balanced stance allows us to shift further lower if a recession hits that pushes investors to hit the SELL BUTTON in earnest.
And yes, we can still turn more bullish if the fundamental picture improves, allowing stock gains to spread to more groups.
Heck, Powell may be the best poker player on the planet and the Fed may be done raising rates. But with that rate-hike gun pointed at my head… I’m going to take you at your word that there are more bullets to shoot.
What to do next?
Discover my balanced portfolio approach for uncertain times.
It is perfectly built to help you participate in the current market environment while adjusting more bullish or bearish as needed in the coming days.
If you’re curious to learn more and want to see the hand-picked trades in my portfolio, click the link below to see what 43 years of investment experience can do for you.
Steve Reitmeister’s Trading Plan & Top Picks >
I wish you a world of success in your investments!
steve reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Publisher, Reitmeister Total Return
SPY shares were up $0.14 (+0.03%) in after-close trading on Friday. So far this year, SPY has gained 15.35%, versus a percentage increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. He is not only the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return Wallet. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
The charge Powell to Investors: Feeling Lucky Punk? first appeared in stocknews.com
https://www.entrepreneur.com/finance/powell-to-investors-do-you-feel-lucky-punk/454299
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