Federal Reserve Chairman Jerome Powell stuck to his script with no surprises.
The market, as has been its way of late, reacted as if this was all spectacular breaking news. To such a degree, one has to ask if the big trading organisations now have a policy of reading where all their client orders are, and simply driving the market in both directions to harvest those orders.
Whatever the reason for the absurd intra-day volatility of the past two weeks, such a process always leads to a single outcome. At least temporary retrenchment of most short-term traders, due to losses and sheer exhaustion. After which, enters a far more reliable and sustainable trend whatever direction is thus decided.
It is noteworthy that the current volatility precedes a typically rather low volume period. Recent volatility could have been partly due to an early start of holidays. After what has been a trying year for market participants. Especially, the bulls.
The ‘buy the dip’ cult has been all but wiped out this year, but is gaining some encouragement from the recent strong rally. That said, I believe we are now back to a position of relative neutrality for both short and medium-term traders and investors.
From here, it is usually the underlying fundamental reality that begins to take hold.
Chairman Powell did and said, what he had telegraphed in advance. That is, a soon slowing to 50-point increments, and that rates would still be going a lot higher and staying high for a considerable period. There is no doubt his remarks leaned to the hawkish side of market expectations.
The Federal Reserve is the worst predictor/forecaster of what the Federal Reserve will be doing with interest rates in the future.
Yes, just as I wrote it. The Fed was saying they would keep rates near zero for a long time when I was forecasting precisely that they did not know it yet, but they would miss the boat on non-transitory inflation and be having to aggressively raise interest rates very late in the game. Ditto at the time for the RBA.
Now we are here, in the midst of one of the most aggressive and late rate hiking cycles in history, they do not appreciate just how widespread, out of control, and wage-driven, inflation now is. This means, that stupid dot plot rubbish, which so many seem to believe represents some kind of reality, is complete nonsense. Why would you trade or invest based on the world’s worst forecasters?
Which way is the global economy headed? Much slower.
Which way is the US economy headed? Much slower.
Which way are interest rates headed? Much higher.
I wonder, therefore, which way stocks may be headed, in a sustained trend, out of this incredible immediate period of volatility?
OK, so we can always be wrong. If my still bearish view is incorrect, then we have a wonderful stop loss level above the recent highs for the US stock market. If my view is correct, then we may well enjoy to the maximum, a potential trend of some 20/30% in price shift. Through 2023.
That’s not a bad risk/reward scenario. Perhaps this could be Santa’s true gift after all.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
