The Federal Open Market Committee (FOMC, see EXPLAINER: FINANCIAL TERM OF THE WEEK) surprised absolutely no-one by raising interest rates on Wednesday by a quarter of a percent to a target range of 4.50% to 4.75%.
Fed Chair Jerome Powell dropped a few hawkish soundbites at his post-announcement press conference, all designed to be played out of context on CNBC, saying that monetary policy “does not yet look sufficiently restrictive” and that“ongoing increases in the target range will be appropriate”.
But he also said, “We can now say, I think for the first time, that the disinflationary process has started” . The overall picture he was desperately trying to paint was that of a Fed that's not done yet, but may possibly be acknowledging that we are at the beginning of the end of the tightening cycle.
Financial markets reacted by effectively calling the Fed’s bluff, viewing Powell’s performance as rather wishy-washy, where he seemed keen not to rule anything out and appeared to be almost defensively over-explaining his position as well as telling us what he thinks that things will look like in December while at the same time claiming to have no idea what things will look like in March.
The market, which is convinced that we are much closer to the end of the rate-hiking era than the Fed wants to let on and that interest rate cuts lie in our not-too-distant future, scoffed at the Chairman.
We believe you now even less than we did before, the market said and is starting to act like an emboldened rebellious teenager, no longer listening to what its parents are saying and going off to do its own thing, which in this case was to buy the crap out of everything - especially tech and communication services stocks, which soared in the Wednesday afternoon session.
It was a similar story overseas. The European Central Bank (ECB) lifted its key rate by half a percentage point to 2.5%, in line with expectations. It said that it plans to raise rates by the same amount in March but thereafter committed only to “evaluate the subsequent path of its monetary policy” - a big walk-back on it’s previously combative stance. The Bank of England also raised interest rates by half a percent, to 4.0%, but indicated that it will slow the pace of hikes to a quarter of a percent or maybe even pause at its next meeting in March.
The benchmark two-year Treasury interest rates fell hard, as did the futures market expectation of where rates will be at the end of the year, becoming even further disconnected from the much higher level that the Fed insists they will be at. The US Dollar responded by extending its recent decline, generally viewed as good thing for US businesses.
Part of the reason the stock market gets so excited about the fact we may be entering the zone of an end to rate hikes is that history tells us that this period has typically rewarded patient investors in the past. Returns for the S&P 500 Index in the year following the end of rate-hike cycles since 1980 have averaged 16% and if you zoom out to the two years following an end to the cycle, that return jumps to nearly 36%.
The problem is that there is another scenario for investors where the market’s current assumption that the era of rates hike is essentially done turns out to be incorrect as inflation rears its ugly head again in the not-too-distant future causing the Fed to have to revisit its role as party pooper by going back to raising interest rates again, financially assaulting those investors sucked in by the current euphoria with a destructive stock market decline that will inevitably follow that decision.
The day after the Fed announcement was marked by a big triple earnings miss; Apple, Amazon and Alphabet/Google all disappointed in their Q4 2022 reports and forward guidance. All three of these stocks, however, ended the week higher than where they were at the beginning.
While the Fed shenanigans were doubtless the biggest event of the week, the Jobs Report on Friday was definitely the most stunning.
Consensus expectations going in were for a 190k increase in jobs in January and for the unemployment rate to tick up to 3.6%. The number came in more than double that with an extraordinary 517k new jobs created and an unemployment rate that actually fell to 3.4%, the lowest since Neil Diamond first sung about a sweet girl named Caroline in 1969.
The final numbers are in for calendar year 2022 and the US economy added an astounding 4.5 million jobs in twelve months. Recession? Er, I don’t think so.
There were few signs of expanding wage inflation in the most recent report, however, which is the part that the Fed focuses most closely on. Average hourly earnings crept only slightly higher and, importantly, no more than expected.
Nonetheless, investors were shaken by the headline numbers of the report, having been expecting further signs of a slowing economy and instead seeing broad growth, particularly across leisure and hospitality, health care and professional services. Market interest rates exploded back upwards after the release of the data on the idea that maybe the Fed won’t be done raising rates quite as quickly as everybody was thinking just 24 hours earlier and stocks sank in response.
It was not enough, however to ruin what was still a winning five days for stock markets, with the S&P 500 up a little under 2% for the week and the NASDAQ-100 up over 3%.
OTHER NEWS ..
The biggest story of 2023? .. Less than two weeks ago, Gautam Adani was the fourth-richest person in the world. With a personal fortune estimated at $120 billion, the self-made Indian industrialist was wealthier than Gates or Buffet.
Then Hindenburg Research, an activist investigative financial reporting organization which shorts the stock of corporations that it then goes on to expose as corrupt, fraudulent or misleading investors, accused Adani and his companies of widespread fraud and “brazen stock manipulation” that it alleged has taken place over decades.
In a highly detailed report, Hindenburg pitched no less than 88 questions to Adani that cast severe doubts on his conglomerate’s financial health. Those ranged from requests for details on the group’s offshore entities to why it has “such a convoluted, interlinked corporate structure” leadingto the astonishing claim that he had pulled off “the largest con in corporate history” . That’s a very high bar indeed (yes, I did recently finish watching the excellent Bernie Madoff docudrama on Netflix).
In a matter of days since the report was released, the value of Adani’s firms has fallen by a head-spinning $110 billion and his own personal wealth has been halved so that he is now down to his last $61 billion as investors flee in droves.
And we may only be witnessing the opening act of what could turn into a financial earthquake. Already burned by the fallout in the story’s first few days is the brother of the disgraced ex-UK Prime Minister Boris Johnson, who has been forced to resign as head of an implicated investment company as a direct result of the report’s findings. Stand by, this story could get very, very big and sting a lot more people and organizations before it’s done.
Why didn’t they just put Bruce Willis on it? .. A ridiculous spat over a Chinese balloon that US authorities admitted posed zero risk of physical harm and carried no intelligence-gathering capability that was lingering over The Middle of Nowhere, USA resulted in the mind-boggling decision to postpone US Secretary State Anthony Blinken’s important and already long overdue visit to China and caused an inevitable but completely unnecessary escalation of tension between the countries when the thing was eventually shot down.
It’s just the latest example of pointless, petty political b******t getting in the way of something as important as the national and global interest of helping to optimize the trading relationship between the world’s two largest economies.
Investors are still very cautious .. Nearly one-third of respondents to an Investopedia investor survey expect the S&P 500 to fall at least 5% over the next six months, while only 16% expect it to trade at least 5% higher, and 11% expect it to be flat.
The lack of conviction that the stock market will trend higher is also reflected in what investors said that they are doing with their money. Only one in five respondents said they are (wisely IMO) investing more in the stock market than a year ago, while over 30% are (foolishly IMO) investing less because they think stocks have further to fall. 47% of respondents said they are “playing it safe” by raising cash and buying cash equivalents, like CDs. Only 11% said they were taking more risk with their investments than they were a year ago.
UNDER THE HOOD ..
Technical analysis can provide a framework that allows investors to follow what is happening, not to anticipate it. Confirmation signals are always required to avoid the whipsaw effect of a high number of false dawns. This inevitably means that a market bottom is viewed as a process, not an event and that the absolute bottom of the market (or absolute top in different circumstances) can never be precisely identified in real time, only after it has actually occurred.
The fact is that we do not yet have enough confirmation signals to confidently call an end to the bear market and it still nags that there has been a lack of evidence of complete capitulation followed by the sustained indiscriminate buying that usually accompanies these turnarounds.
Despite these nuanced imperfections in the traditional bear-to-bull market narrative, "golden crosses" are forming in some of the major indexes. This is when a stock or index's 50-day moving average crosses above the 200-day moving average and heads higher. These are considered to show a technically positive outlook for stock prices contained in that index.
The primary issue we now face is the market’s overbought condition, which must be watched carefully. This can work itself out in one of two ways. Overbought conditions at the genuine birth of a sustainable bull market are positive, carrying only temporarily negative conditions, before providing a springboard for a further resurgence. However, if this is not the start to a new bull market and more like a head-fake à la the multiple times it happened in 2022, several indicators are right now up against the exact levels from which they invariably sharply reversed on previous occasions.
How this resolves itself in the short term is going to be very important in assessing the viability of this rally.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Q4 2022 earnings season continues next week, with about 90 of the S&P 500 companies scheduled to report. The scorecard so far: earnings are down about 3% from the same period a year ago.
Disney, Philip Morris, CVS, BP, Uber, PayPal, Hilton, Honda, Take Two Interactive, Chipotle, Expedia, DuPont, Royal Caribbean, Simon Property Group and AbbVie will be among the highlights.
It will be a relatively quiet week on the economic-data calendar after last week’s avalanche, with really just the University of Michigan's February Consumer Sentiment Index of interest. That's forecast to come in roughly unchanged from January's figure, which showed widespread pessimism among consumers.
On Tuesday, economists, Federal Reserve watchers and nerds like me will be tuning into a speech from Fed Chairman Jerome Powell at the Economic Club of Washington DC to see if we can pick up any meaningful nuggets.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months) ..
* ↑Bullish: 30% (28% the previous week)
* →Neutral: 35% (35% the previous week)
* ↓Bearish: 35% (37% the previous week)
* Net Bull-Bear spread .. ↓Bearish by 5 (Bearish by 9 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5th 2009, right near the end of the Great Financial Crisis. The lowest percentage of AAII bears was recorded at 6% on August 21st 1987, not long before the stock market crash of October 1987.
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
LAST WEEK BY THE NUMBERS ..
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Communications Services (two biggest holdings: Alphabet/Google, Meta/Facebook) - up 5.2% for the week
- Last week’s worst performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 5.7% for the week
- The NASDAQ-100 rose substantially more than the S&P 500
- US Markets again soundly beat both Emerging Markets and Foreign Developed
- Small Caps were the week’s winners ahead of Mid, with Large Cap bringing up the rear
- Growth stocks performed a little better than Value stocks
- The proprietary Lowry's measure for US Market Buying Power is currently at 190 and rose by 7 points last week and that of US Market Selling Pressure is now at 111 and fell by 2 points over the course of the week.
- SPY, the S&P 500 ETF, remains well above both its 50-day and 90-day moving averages and its long term trend line. SPY ended the week 10.7% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains well above both its 50-day and 90-day moving averages and its long term trend line. QQQ ended the week 17.6% below its all-time high (11/19/2021).
The Lowry’s Percent of Stocks Above Their 30-Day Moving Average reading rose from 54% to 78%.This important 0-100% reading measures overall positive stock participation. Higher readings indicate increasing positive market momentum, lower readings indicate increasing downside momentum. Extreme readings below 20% and above 80% could potentially point to imminent short term trend reversals.
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”), implied by S&P 500 index option trading, ended the week lower at 18.3. It remains well below its 50-day and 90-day moving averages and is also still far below its long term trend line.
ARTICLE OF THE WEEK ..
I miss Sam Bankman Fried. He’s been out of the news for a few days now, apart from a report that he has apparently told friends that he is expecting prison to be just like it appears in “The Shawshank Redemption” (btw, I hold the apparently sacrilegious view that this is just about the most over-rated movie ever - I really fail to see what all the fuss is about, it’s just kind of ok). So, to hold us all over till the next shoe drops in this wild FTX story, here are 13 lessons to learn from the SBF and FTX debacle.
EXPLAINER: FINANCIAL TERM OF THE WEEK ..A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
The term Federal Open Market Committee (FOMC) refers to the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy in the United States by directing open market operations (OMOs). The committee is made up of 12 members, including seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents, who serve on a rotating basis.
The 12 members of the FOMC meet eight times a year to discuss whether there should be any changes to near-term monetary policy. A vote to change policy would result in either buying or selling U.S. government securities on the open market to promote the growth of the national economy. Committee members are typically categorized as hawks favoring tighter monetary policies, doves who favor stimulus, or centrists/moderates who are somewhere in between.
The FOMC chair is also the chair of the Board of Governors. The current makeup of the board is as follows:
* The chair is Jerome Powell, who was sworn in for a second four-year term on May 23, 2022. He began his first term in this role in February 2018. Powell is considered a moderate.
* The vice-chair of the FOMC is Lael Brainard. She was also sworn into the position on May 23, 2022, for a full four-year term. She joined the board in June 2014.
* Other Federal Reserve Board members include Michelle Bowman, Michael Barr, Lisa Cook, Philip Jefferson, and Christopher Waller.
There are 12 Federal Reserve districts, each with its own Federal Reserve Bank. These regional banks operate as extensions of the central bank. The president of the Federal Reserve Bank of New York serves continuously while the presidents of the others serve one-year terms on a three-year rotating schedule (except for Cleveland and Chicago, which rotate on a two-year basis).
The one-year rotating seats of the FOMC are always comprised of one Reserve Bank president from each of the following groups:
* Boston, Philadelphia, and Richmond
* Cleveland and Chicago
* St. Louis, Dallas, and Atlanta
* Kansas City, Minneapolis, and San Francisco
The geographic-group system helps ensure that all regions of the United States receive fair representation.
The FOMC has eight regularly scheduled meetings each year, but they can meet more often if the need should arise. The meetings are not held in public and are therefore the subject of much speculation on Wall Street, as analysts attempt to predict whether the Fed will tighten or loosen the money supply with a resulting increase or decrease in interest rates.
In recent years, FOMC meeting minutes have been made public following the meetings. When it is reported in the news that the Fed changed interest rates, it is the result of the FOMC's regular meetings.
During the meeting, members discuss developments in the local and global financial markets, as well as economic and financial forecasts. All participants—the Board of Governors and all 12 Reserve Bank presidents—share their views on the country’s economic stance and converse on the monetary policy that would be most beneficial for the country. After much deliberation by all participants, only designated FOMC members get to vote on a policy that they consider appropriate for the period.
The Federal Reserve possesses the tools necessary to increase or decrease the money supply. This is done through OMOs, adjusting the discount rate, and setting bank reserve requirements. The Fed's Board of Governors is in charge of setting the discount rate and reserve requirements, while the FOMC is specifically in charge of OMOs, which entails buying and selling government securities. For example, to tighten the money supply and decrease the amount of money available in the banking system, the Fed would offer government securities for sale.1
Securities bought by the FOMC are deposited in the Fed's System Open Market Account (SOMA), which consists of a domestic and a foreign portfolio. The domestic portfolio holds U.S. Treasuries and federal agency securities, while the foreign portfolio holds investments denominated in euros and Japanese yen.
The FOMC can hold these securities until maturity or sell them when they see fit, as granted by the Federal Reserve Act of 1913 and Monetary Control Act of 1980. A percentage of the Fed's SOMA holdings are held in each of the 12 regional Reserve Banks; however, the Federal Reserve Bank of New York executes all of the Fed's open market transactions.
The process begins with the results of the meeting being communicated to the SOMA manager, who relays them to the trading desk at the Federal Reserve Bank of New York, which then conducts transactions of government securities on the open market until the FOMC mandate is met.
The interaction of all of the Fed's policy tools determines the federal funds rate or the rate at which depository institutions lend their balances at the Federal Reserve to each other on an overnight basis. The federal funds rate, in turn, directly influences other short-term rates and indirectly influences long-term interest rates; foreign exchange rates, and the supply of credit and demand for investment, employment, and economic output.
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