Jay Powell Pivots
I watched the screen this week on Wednesday as Jay Powell delivered his latest gaslighting to the market. Key takeaways:
The Fed’s next move is likely down and not up - that was huge and the market loved it;
The Fed is now looking to alternative sources of jobs data to see how inflation is doing - the market liked that too.
Why is the Market Obsessed with the Fed?
Because the overall debt burden is so high in the US right now; because interest expense exceeds defense spending and because we have, since the GFC, begun to rely on the Fed to bail the markets out of every problem, the monthly pronouncements of the Fed Chair have become like crack cocaine to the financial markets. We know it’s wrong and we know we shouldn’t - it shouldn’t be this way; but we can’t help ourselves.
The Dow traded in a range of about 550 points during the course of the day - fortunes made and lost no doubt - but ended up largely ‘unch’ up 0.2%. Powell furrowed his brow about a lack of progress in getting inflation back to 2% and said they would remain highly attentive to the risks of price gains.
Gaslighting the Market
The problem is that markets started the year with expectations that inflation was on the way to being fixed - firmly on its way back to 2% - and that the Fed would cut rates 4, 5 maybe 6 times in 2024.
Powell has been chipping away at this all this year so far and the market has now adjusted its expectations to 1, 2 maybe no cuts. Now, Powell has shifted the language - language is carefully parsed on Fed day - to saying the next move is likely to be down rather than up…which is taken to mean that at least he is still thinking of cutting.
Moving the Goal Posts
The statement that the Fed is going to look at alternative data sources (Indeed, for example; or Dodge Momentum Index; Architectural Billings Index) on unemployment and the health of the economy is taken to mean that there may be signs outside non-farm payrolls (NFP), that the employment market is softening. This is taken to be a good thing by the constituency that really matters - the financial markets - because if people are losing their jobs, the economy must be slowing…which means…rate cuts. Happy markets.
Two days later, the traditional (not alternative) source of jobs data, NFP, came in below (175,000 added in April) consensus expectations (243,000 forecast) and the market gave a cheer: up over 1%, or over 400 Dow points.
One might be forgiven for concluding that the markets are truly detached from main street - Wall Street and Main Street is a very traditional juxtaposition - when more people with more jobs is bad for the financial markets. Huuh?
This this post from @BuccoCapital on X captures the sentiment well.
“You are celebrating people losing their jobs because it makes the numbers on your phone green, are you not?”
Is Recession Good or Bad?
Recession indicators are another mixed bag. If we are headed into a recession, the Fed will likely find data to support cutting rates…which the market will like. The chart below sheds some light on the prospects for a recession based on data supplied by the Institute of Supply Management (ISM). Note the percentage chances of a recession in the black boxes on the right.
This looks overall positive for the economy. However, there is some dissonance with local data from the ISM. The Chicago Fed data - look at the right hand Y axis - is telling a different story from the overall national ISM data - left hand Y axis.
Assuming the Fed can figure out what is actually going on, using all its alternative and traditional data sources, it may decide to cut rates going into a recession. Historically, though, rate cuts going into a recession do not indicate good times ahead for equity returns. The only time an easing cycle has correlated with an upswing in the S&P 500 was 1984.
Concluding Thoughts
This article from today’s FT is instructive on how to cope with all this. The basic set-up is that Odin, All-father, greatest of the Norse gods, went to his wayward fellow god Loki, and put him in charge of the stock market. Odin told Loki that he could do whatever he wanted, on condition that across each and every 30-year period, he ensured that the market would offer average annual returns between 7 and 11 per cent. If he flouted this rule, Odin would tie Loki under a serpent whose fangs would drip poison into Loki’s eyes from now until Ragnarök.
The message of the article is that retail investors buy and sell at the wrong times and end up with worse returns than the funds in which they invest. They are encouraged by the information they consume and the apps they use to track the performance of their investments to do something on a regular basis.
They panic when the market is bad and sell when they should be buying and, as Wednesday’s trading range indicates, most of the time they would be better off doing nothing…
Which is what weekends are for!