Fed “good cop/bad cop” … Goolsbee tries to spoil the party … dangerous mixed messaging… be bullish until the market suggests otherwise … your last chance for the Early Warning Summit 2024
It feels like Fed members are performing a poorly acted “good cop, bad cop” routine.
As to “good cop,” last week, Federal Reserve Chairman Jerome Powell sounded overtly dovish in his post-FOMC meeting press conference.
Wall Street didn’t need Powell to sound this way to maintain recent bullish momentum. It just needed Powell to avoid sounding overtly hawkish and the party would keep going. So, it was shocking when they got “party hearty” Powell spiking the punchbowl.
Here’s MarketWatch:
Federal Reserve Chairman Jerome Powell startled economists with a press conference Wednesday that was viewed as much more dovish than expected.
It was “12 doves a-leaping,” said Michael Feroli, U.S. economist at JPMorgan Chase…
The first dovish signals came in the Fed’s statement and economic forecasts at 2 p.m. Eastern. First, the Fed penciled in three rate cuts in 2024 instead of two that were projected in September. The Fed also softened its tightening bias by saying they were mulling the need for “any” more hikes.
Then, half an hour later at his press conference, “Chair Powell did nothing to undo the impression of those signals,” said Feroli, in a note to clients. Powell said Fed officials were starting to discuss when to cut rates.
The combination of the additional penciled-in rate cuts next year and Powell’s unexpected (and unnecessary) dovishness ignited a new wave of buying pressure that has pushed the Dow to a series of new all-time-highs over the last few days. Meanwhile, the S&P is within 1% of setting its own all-time high (and might be setting a new all-time-high by the time you read this), and the Nasdaq is less than 5% away.
Keep in mind, the gains since last week’s Fed meeting have come on top of a market that has surged so high, so fast, it’s been overbought (or nearly overbought) from a Relative Strength Index (RSI) perspective since mid-November.
For newer Digest readers, the RSI is a momentum indicator that measures the extent to which an asset is overbought or oversold. A reading over 70 suggests an asset is “overbought” (and likely poised to pull back as traders take profits).
Take a look at just how long the S&P has been overbought.
But then came yesterday’s “bad cop” routine from Chicago Fed President Austan Goolsbee
He claimed to be “surprised” by the market’s reaction.
From CNBC:
A Federal Reserve official said Monday that the market may have misunderstood the central bank’s intended message last week after stocks and bonds rallied sharply.
“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” said Chicago Fed President Austan Goolsbee said on CNBC’s “Squawk Box.”
“I was confused a bit — was the market just imputing, here’s what we want them to be saying?”
The Fed president also pushed back against the idea that the Fed is actively planning on a series of rate cuts.
“We don’t debate specific policies, speculatively, about the future. We vote on that meeting,” he said.
Goolsbee’s “confusion” is about as logical and warranted as being confused when a dog salivates after you shove a steak in his face.
Sure, the market is pricing in more rate cuts than the Fed’s Dot Plot suggested, but the essence of this rally is not Wall Street’s misinterpretation – it’s the Fed’s careless messaging.
Powell had numerous opportunities to tamp down bullish expectations in his press conference yet did nothing
Whereas prior press conferences focused on preventing a resurgence in inflation, this time, Powell zeroed in on the risk of harming the economy by leaving rates too high as inflation falls.
From Powell:
We’re aware of the risk that we would hang on too long. We’re very focused on not making that mistake.
He also added:
There’s a general expectation that [rate cuts] will be a topic for us, looking ahead.
But the greatest example of Powell tacitly greenlighting a Wall Street rally came when Nick Timiraos from The Wall Street Journal got the mic. He asked if the market’s expectation of a September Fed Funds rate that’s a full point below the current level is something that Powell is “broadly comfortable” with.
Rather than use this softball as an opportunity to talk down the market/Fed misalignment, Powell mush-mouthed his way through a bunch of gobbledygook:
So, this last year has been remarkable for the sort of seesaw thing back and forth we’ve had over the course of the year of markets moving away and moving back and that kind of thing.
So, and what I would just say is that we focus on what we have to do and how we need to use our tools to achieve our goals, and that’s what we really focus on.
And people are going to have different forecasts about the economy, and they’re going to — those are going to show up in market conditions, or they won’t, you know, but in any case, we have to do what we think is right.
And, you know, in the long run, it’s important that financial conditions become aligned or are aligned with what we’re trying to accomplish, and in the long run they will be, of course, because we will do what it takes to get to our goals.
And ultimately that will mean that financial conditions will come along. But in the meantime, there can be back and forth, and you know, I’m just focused on what’s the right thing for us to do, and my colleagues are focused on that too.
And yet Goolsbee is “surprised” the market exploded higher.
Sorry. Not buying it.
Neither is our hypergrowth expert Luke Lango.
From Luke’s Innovation Investor Daily Notes:
For months and months, the Fed and other central banks across the globe kept hammering in this message that they would keep rates higher for longer. That era appears over.
With the Fed’s dovish pivot [last week] – and explicit guidance for rates to come down next year – the market has started to price out the “higher for longer” messaging from all central banks.
Now, for the first time since Silicon Valley Bank’s collapse, the global median expected policy rate in six months is lower than the current global median policy rate.
Higher for longer is over. Lower for 2024 is the new theme.
This mixed messaging from the Fed is dangerous
What if Luke’s and my interpretation of Powell is wrong?
What if Goolsbee’s more cautious tone better reflects the collective perspective of the Fed members?
Well, that’s a frustration because it’s a problem that could have been avoided. The Fed can easily prevent market misinterpretation simply by being on the same page with their talking points. That shouldn’t be too difficult to accomplish.
Unfortunately, this good cop, bad cop routine creates ample room for bullish misinterpretation. And that opens the door to market prices that – based on what Goolsbee is insinuating – are too high.
But again, this isn’t solely the market’s creation. We can lay a big chunk of the blame at the feet of the Fed.
Either way, the question now is: How do we respond?
Well, the same way we’ve been responding all year: We continue to trade this bullishness higher.
As traders often say, “price is truth.” And right now, market prices are telling us we have a strong bull market on our hands.
Yes, we’re long overdue for a breather as we noted in yesterday’s Digest. But Powell’s comments – as well as what he chose not to say – give the edge to bullish follow-through after whatever normalization pullback occurs over the next few weeks.
So, mind your stop-losses and position sizes, but this market wants to run. Let’s run with it.
As for Goolsbee’s comment, it sounds like a feeble “too little, too late” attempt to walk back Powell’s sneak peek at what’s coming.
Maybe that’s the wrong way to interpret it, but Powell had the opportunity to talk down the market, yet instead chose to crank up the music and pull out the flask.
Until your stop-losses suggest otherwise, bank on more bullishness.
On that note, tomorrow is the final day to access the free replay of last week’s Early Warning Summit 2024 with Louis Navellier, Eric Fry, and Luke Lango, which suggested a very bullish 2024 is on the way
As part of the evening, the three experts discussed inflation… when will the Fed will cut rates and how low they could go… the odds of a recession… which sectors will treat your money the best in 2024… artificial intelligence… the corners of the market investors would be wise to avoid next year…
The entire event was filled with valuable market commentary you can put to work in your portfolio today. Our experts even gave away the names of three stocks they believe are positioned to soar in 2024.
As noted a moment ago, tomorrow is the last day to access this free replay. So, if you missed it, click here to see how our experts are positioning themselves for a monster 2024.
Have a good evening,
Jeff Remsburg
