Morning Note: Messing with the Market's Belief System

As I keep stating, in our view, the amazing stock market resilience in the face of some serious, call em Fed headwinds, reflects, among another myopic view or two, what amounts to general disbelief that Fed heads truly mean it -- or have the will to follow through amid a market meltdown -- when they say they're serious about tackling inflation.

Here's Bespoke Investment Group on yesterday's market action and a bit of bewilderment (bolded bullet point) over the "selloff:"

• One of the most dovish FOMC members, Lael Brainard, cleared the way today for a 50 bps rate hike in May with a speech at a Minneapolis Fed forum on inflation. 
• Brainard expects the combination of a “rapid pace” of balance sheet runoff “as soon as May” and rate hikes will “bring the stance of policy to a more neutral position later this year”. 
• The last FOMC Summary of Economic Projections in March had a long-run Fed Funds rate estimate of 2.325%, and that policy rate is widely viewed as the FOMC’s view of “neutral” policy.
• That would imply Brainard sees the possibility for another 200 basis points (bps) this year, slightly more aggressive than market pricing and consistent with multiple 50 bps hikes as well as tightening at every meeting; while that forecast is definitely contingent on inflation staying high, the rhetoric today was consistent with a 50 bps tightening in May. 
• KC Fed President Esther George reinforced that message in a speech just after Brainard, arguing a 50 bps hike is “an option we have to consider” and that “we may have to go above neutral to bring inflation down”. 
• None of this is inconsistent with or a rhetorical departure from the message delivered by FOMC Chair Powell at the March FOMC, but unlike the equity market reaction to that set of communications, stocks plunged in response today with the S&P 500 immediately dropping almost 1% from session highs in response to Brainard and making a series of lower highs and lower lows throughout the session to close down 1.3% on the day. 
• The NASDAQ 100 underperformed, falling 2.2% against a 2.4% collapse in small caps that followed a similar, sharp negative response to the speeches this morning. 

Again, yesterday speaks to our view that "the market" has, perhaps to this point, continued to bask in the disbelief that indeed the Fed might be willing to allow for some true market pain to actually attempt to address these 40-year high inflation prints. The latest commentary out of voting members appears to be playing havoc with that belief system.

Asian equities sold off overnight, with all but 2 markets we track closing lower.

Europe's a mess this morning as well, with all but 1 of the 19 bourses we follow trading lower as I type.

US stocks are maintaining yesterday's downward momentum to start the session: Dow up 284 points (0.82%), SP500 down 1.34%, SP500 Equal Weight down 1.10%, Nasdaq 100 down 2.39%, Nasdaq Comp down 2.43%, Russell 2000 down 1.69%.

The VIX sits at 24.46, up 16.21%.

Oil futures up 0.39%, gold's up 0.33%, silver's up 1.01%, copper futures are down 0.66% and the ag complex (DBA) is up 1.70%.

The 10-year treasury is down (yield up) and the dollar is down 0.13%.

Among our 37 core positions (excluding cash and short-term bond ETF), 10 -- energy stocks, ag futures, silver, utilities stocks and base metals futures -- are in the green so far this morning. The losers are being led lower by ALB, AMD, solar stocks, PARA and Sweden equities.

The ultimate investment: 

"The best investment you’ll ever make is in trying to understand and maximize the value you can contribute to other people."

--Roche, Cullen. Pragmatic Capitalism 

Have a great day!
Marty