Fed Chair Powell Played Santa and  Not Scrooge

Fed Chair Powell Played Santa and Not Scrooge

December 20, 2023

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Overall, despite my 2023 expectations for the S&P 500 and other component parts of the US equity markets have clearly been met. So much so that even though I have been positive on the markets, I am a little hesitant to throw more fresh capital at the market after a straight run from 4,100 to 4,700 in a matter of 6 weeks. I say this to mirror what Thomas Lee of Fundstrat noticed over this past weekend. In interviews and on-line surveys with institutional money managers, he found that 66% of those interviewed are still bearish on the markets! Bottom line, the trends have proven resilient in both equities and US Treasuries and there hasn't been sufficient evidence of trends giving way to expect a short-term reversal. I suspect that there might be some give back at the tail end of the month as many participants leave early for the Christmas / New Year holiday. However, until markets show a pullback to multi-day lows at a minimum, it will be early to act upon. This is what the markets look like right now. It is important to recognize the three waves down and then the recovery move higher. It is also super important to recognize that this move higher happened way before the surprise Fed announcement last Wednesday:

In looking at an updated reading of Ari's breadth indicators on the more broad NYSE index, the breakout above its July peak seems to be a confirmation of the resumption of the bull cycle, in his view. He asks, "Is the market overbought?" But he follows with the dilemma if one truly feels that they can sell here, hoping that it is a short-term top and able to buy right back in at a short-term low. Instead, he follows the adage of pick your weeds and water your flowers. Basically, if you have things that have not participated, chances are it will probably be some time before this happens as the market has been broadening. Probably best to stay concentrated in winners that continue to win. What the markets are experiencing can be easily recognized in the below tug-o-war:

Investors of all levels are fighting to create performance rather than following the data. This year has been a historic year. As seen below, over $240 billion has been pulled out of stock investments over the year and yet the S&P 500 is up over 20%. This has never happened before in history.

The next point I want to focus on are Ari's breadth measures. These are super important as they reflect the move of the percentage of stocks above their 200 day moving average. This is an expanding number. This means that it isn’t only the “Elite Eight” going up. When this goes above 60% and it happens when previous tops are being cleared at the same time (July top being cleared), there is a high probability of a continued advance. 

Given all of this, it appears that the markets seem to be spreading out in the advance (increased breadth) and even laggards are joining the party. When a market advances and MORE companies join the party vs. fewer, this is a very strong measure of a continuation of the advance being in the cards. 



We have experienced 11 rate hikes back-to-back. On December 1st Powell said that he was staying firm on fighting inflation but he did not feel the need to tighten rates again. Then, unexpectedly, this past Wednesday, he comes out and starts discussing rate cuts; 3 in 2024, 2 in 2025 and 2 in 2026, Wow!!! He also said that his concern was that the tightening happened so much in such a short period of time that as much he is concerned and focused on our economy meeting his 2% inflation target, that he was equally concerned about having tightened too much too fast and possibly throwing the economy into a recession. If this were the case, he would then be forced into unwinding much of the work he has put in the last year. So here is the dilemma we are faced with:

  • If we turn back to an easier monetary policy by lowering interest rates, do we let the dreaded inflation genie out of the bottle?
  • If we don't lower rates, instead of an acceptable economic slowdown, we go into the more painful recession? 
  • At what point does the ether of all the stimulus money run out and consumption growth, great labor numbers, and wage growth come to a screeching halt? 

Inflation is not over. We are not experiencing deflation. All price increases- the sharply understated food and services prices- are still high and continuing to rise. One must wonder if there is some political positioning going on by the incumbent party going into 2024 given that they are falling behind increasingly in the polls. This is all conjecture of course, but we will be vigilant to watch the direction of various inflation measures to see if several rate cuts truly are in the picture. Now, what was truly amazing was the action out of the bond market when Powell made his comments last week. On November 1st the 10-year was at 5%, December 12th it was at 4.27% and after Powell's comments it dropped to 3.94%. This is an overall decline of 21% in a matter of 6 weeks. The question I ask myself is if the short-term money is dropping and the cost of capital for companies and home buyers is dropping, then how much of the money on the sidelines could come back into the equity markets? Note that in the Cumulative Fund Flows illustration above, there is currently $1.1 Trillion in cash!

Andrew Adams of Saut Strategy showed a very compelling chart of the S&P 500 and a pattern that it is hammering out called a long-term “cup and handle.” Given that the S&P 500 has cleared its July high, the handle has been completed after the cup from November of 2021 to July of 2023 had been formed. If this formation holds true, he sees targets on the S&P up to 5,700 as a MINIMUM upside! See the chart below:

So, what could go wrong? What am I looking for to tell me that it is time for a period of "give back?" Last week, Tim Hayes of NDR Research wrote a fairly complete report on this. Tim said, "The Fed's pivot toward rate cuts and the continuing evidence of an economic soft landing have super-charged the US market advance, but the confidence comeback has not been limited to the US. True, more breadth improvement has been evident, and this is supportive of a continued market advance. Given that the markets are acting as they are (see Ari's chart above), 82% of the time after a breadth reading like this, the median advance of 21% in the indexes would be likely." Tim goes on to say that even though indicators support prospects for a good start of 2024, sustained high optimism would leave the market vulnerable to negative surprises later in the year. These could include:

  • Economic data that a soft landing could be harder than expected.
  • A return of earnings disappointments after a two year of higher-than-expected reported earnings. 
  • Any international conflict that escalates higher than what has been seen thus far. 
  • An economic shock as a result of the discontinued funding of the Ukraine conflict. 

In closing, you won’t be hearing from me until after Christmas. I wish you all a very Merry Christmas. Before I leave you, I want to go back to what 2023 has looked like. Yes, up a lot is great, but looking in the rear-view mirror, it hasn’t been a straight road this year. It has been one with many twists and turns. My point is to please remember that this is a journey. If you fall in love with the journey, you will be in love forever.

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