Thursday, November 4, 2021

Morning Note: That "Forward Guidance" Tool

In a technical look at the market video I shot yesterday morning (sending the finished product to you shortly), I mentioned the bullish seasonality that takes us to the end of the year, then intimated that the calendar turn may usher in a more difficult period for stocks.

In yesterday's morning note (an important read btw in case you missed it) I anticipated what "the market" was anticipating from yesterday's Fed meeting; i.e., an announcement that the monthly bond purchases would be "tapered" over the next few months, and that J. Powell would, in syrupy fashion, successfully cater to myopic stock market wants so as to avoid any immediate meaningful downside reaction. And, yes, that's precisely how it played out...

Macro analyst Julian Brigden pretty much summed it up yesterday:

"Compare and contrast. Tuesday, ISM Manufacturing Chairman i.e. a man on the ground, "it's not clear when this (wage) spiral stops". To Powell today, a man in the clouds; “We don’t see troubling increases in wages. We don’t expect those to occur.""

Now, let's be clear, Powell and company aren't lacking in smarts, so, absolutely, it's safe to assume that they don't truly buy into the rhetoric they're spewing. Thing is, their institution has SO backed itself into the proverbial corner that there's zero room for truth and objectivity. For, if indeed, they were to state the obvious the markets would have to discount them addressing (ending bond purchases altogether and/or hiking rates [stable prices are in their mandate!]) the obvious. I.e., the markets would crack...

After all, from the Fed's own Finance and Economics Discussion Series:

"Forward guidance—the issuance by a central bank of public statements concerning the likely future settings of its policy instruments—is widely regarded as a new tool of monetary policy."

I'd rephrase that as follows:

Forward guidance—the issuance by a central bank of public statements in an attempt to influence the market's view of present and future conditions, regardless of the on the ground reality—is widely regarded as a new tool of monetary policy.

With regard to a potentially more difficult period to come for stocks, economist Peter Boockvar offers up some history around Fed policy shifts:

"Outside of the August 2015 selloff related to the Chinese yuan modest devaluation and the Covid induced crash, every notable correction in stocks surrounded a change Fed policy toward tightening.
QE1 ended on March 30th 2010. We rallied for the next 3 weeks and then proceeded to fall by 16% from high close to low close in early July.
On June 30th 2011 QE2 ended. We held in for the next 3 weeks and then sold off by 18% into early October.
Around the time QE3 was ending in the fall of 2014, the S&P 500 was down as much as 10% intraday into mid October.
Yellen finally got around to hiking rates in December 2015 after 7 years of zero. We rallied for 2 weeks and then sold off by 12% into mid February 2016.
Yellen didn’t hike rates again until December 2016 but 2017 was saved by the hopes of the corporate tax cut which was signed at year end 2017. After that excitement and another rate hike in December 2017, the vol trade blew up in January/February 2018 with a 10% correction.
Fast forward to Q4 2018 and we all know what happened when Powell kept hiking and the S&P 500 fell 20%."

Time will tell... 

Once again, the US equity averages (save for the Dow and the Russell) are rising early in the session on relatively poor breadth. Nearly 60% of the S&P 500's members are in the red as I type. Same for the Nasdaq Comp... despite both indexes presently trading higher.

Asian equities mostly rallied overnight, with 12 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 15 of the 19 bourses we follow trading up, as I type.

US major averages are mixed: Dow down 93 points (0.26%), SP500 up 0.15%. SP500 Equal Weight down 0.19%, Nasdaq 100 up 0.74%, Nasdaq Comp up 0.40%, Russell 2000 down 0.07%.

The VIX sits at 15.42, up 2.19%.

Oil futures are up 0.35%, gold's up 1.21%, silver's up 1.51%, copper futures are down 0.56% and the ag complex is up 0.10%.

The 10-year treasury is up (yield down) and the dollar is up a big 0.60%.

Led by AMD (chip maker), ALB (lithium miner), semiconductor (chip makers) stocks, MP (rare earth miner) and silver -- but dragged by Viacom/CBS, base metals futures, financial stocks, Latin American equities and Verizon -- our core portfolio is off 0.11% to start the day.

A timely quote, given the constraints on the Fed that their utter market-centricity dictates:

"Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences."

--Papic, Marko. Geopolitical Alpha

Have a great day!

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