Wednesday, December 14, 2022

Morning Note: It's ALL About the Fed, Now and Next Year

While the CPI report inspired yet another wild day of action in equity markets, when we get right down to it, it's really all about what transpires during J. Powell's post-Fed-meeting press conference later today.

In fact, allow me to rephrase the above: Yesterday morning's softer than expected CPI report initially got traders thinking that Powell will play the dove tomorrow, until, that is, they, perhaps, realized that the stuff Powell says the Fed's focused on remained elevated in price, and that a rallying market defies the Fed’s desire to keep financial conditions tight, and that last week's PCE read (which came in hotter than expectations) is the Fed's preferred measure, yada yada. 

I.e., while stocks did close higher on the day, they settled at a level notably below the session's high.

So, in a nutshell, financial markets are at the mercy of the Fed... Powell knows full well precisely what to say, or to imply, to solicit whatever directional response he'd prefer, assuming he has a preference (for the market) right here... Traders are simply speculating on which direction he'll lean... Frankly, folks, that's it!

Now, thinking beyond tomorrow (i.e., thinking like an investor), I want to paraphrase for you a conversation I had yesterday with a good friend of mine who is not a professional investor, although I must say he's without question among the very best/smartest business owners (and people in general) I've ever known... We'll call him Kraig, because that's his name.
Kraig -- What's going on in the markets?

Me -- Have you been watching the day to day action?

Kraig -- No

Me -- Well, today was pretty crazy... CPI for November came in soft this morning, and within the first minute of the release Dow futures were up over 800 points.

Kraig -- Wow!

Me -- Yeah, but then they proceeded to give it all back at one point during the cash session... 

Kraig -- So what do you think?

Me -- Pretty much what we've been talking about lately... Our own index, etc., still tells us recession's coming first half of next year, and that's when we believe we'll see this bear market finally shake itself out... In the meantime, it's just a lot of noise...

Kraig -- You know I don't look at the numbers all day long like you do, I just sit back and watch what's going on out there... And it seems to me that the Fed raised rates so much so fast that I just don't think the markets or the economy has caught up to it yet... So I agree with you, I don't think we've seen the worst so far.
We went on to talk about what that'll look like in terms of consumer activity and balance sheets as things progress, and how we both view the world beyond the current bear market, the attendant opportunities to ultimately exploit, and so on... But my point here this morning is that my buddy Kraig, who is not an economist, 100% understands the lag effect of monetary policy, via his real world experience and well-honed intuition... And he's certain that it almost has to culminate in a meaningful slowdown in the economy...

To Kraig's point, here's senior analyst with BCA Research Jonathan LaBerge during a BCA podcast recorded last week:   emphasis mine...
"A plurality of senior strategists at BCA Research said, yes, that they expect that there in fact will be the onset of a recession next year, in 2023, or because of course financial markets lead what happens in the actual economy, that even if there's a recession that begins early in 2024, that we're likely to see a significant decline in risky asset prices next year in anticipation of that recession regardless of whether it happens in the first half of next year, second half of next year or very early in 2024.

So, we laid it out in the outlook, what the basis is for this, I mean it's fairly straight forward, it's not as complicated as perhaps some people outside of the firm, or other market commentators, are making it out to be... The odds of a recession next year are now rising to what we would say are probable -- and are driven by the fact that monetary policy has become tight."

Stay tuned... 

Asian equities rallied overnight, with 13 of the 16 markets we track closing higher.

Europe's leaning red so far this morning, with 11 of the 19 bourses we follow trading down as I type.

US stocks, on the other hand, are leaning green to start the session: Dow up 100 points (0.29%), SP500 up 0.31%, SP500 Equal Weight up 0.23%, Nasdaq 100 up 0.24%, Nasdaq Comp up 0.29%, Russell 2000 up 0.35%.

The VIX sits at 22.60, up 0.22%.

Oil futures are up 1.92%, gold's up 0.04%, silver's up 0.54%, copper futures are up 0.30% and the ag complex (DBA) is down 0.15%.

The 10-year treasury is up (yield down) and the dollar is down 0.08%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 23 -- led by energy stocks, cyber security stocks, utility stocks, silver and Amazon -- are in the green so far this morning. The losers are being led lower by Brazil equities, base metals futures, communication stocks, AT&T and Mexico equities.

Successful long-term investing is all about seeing the world for what it is, remaining unemotional about what you see, and proceeding accordingly:

“For after all, the best thing one can do when it is raining is let it rain.”
-- Henry Wadsworth Longfellow

Have a great day!

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