Markets Consolidate Fed Gets Set

While most of the market took the Federal Reserve Chairman’s testimony as something new and shocking, such comments were merely a continuation of prior messaging.

Which just goes to show how capable markets remain of creating their own wishful thought bubbles.

New York trading did see stocks attempt to rally a couple of times. Though fresh selling, driven by the previous day’s Powell comments, remained prevalent. Consolidation of a previous day’s sharp move, often is an indication of a continuation price pattern. Though, this is clearly a market having a big knife’s edge moment, just here.

A tip either way out of the past 24 hours range, is likely to gather sustainable momentum. The bulls for the moment are just hanging in there. And the bears are quite excited. It is the fundamental economic backdrop of slightly positive economic data which is likely to encourage a 50 point rate hike from the Fed, that has me still favouring further weakness for equities.

Chairman Powell has reiterated that data will drive whether to hike 25 points or 50 points. I said at the time of the first 25 point hike that the Fed had made a costly mistake in slowing too early. Now, that it is self -evident that inflation is accelerating and has the potential to do so through the year, the Fed is forced to reconsider 50 point increments. Somewhat embarrassing, but the Fed seems to be sidestepping hat point for the time being.

What we are left with is the prospect of un-certainty around perhaps the next three rate hikes or more, as to whether they will be 25 or 50 points. This really is a fearful uncertainty for equity markets. Quite the contrast to the previous ‘hopeful’ situation.

It is always possible that markets can simply shrug off rate hikes. As they did at the start of the year. However, this is now a very different situation where ‘Fantasy Economics’ of pivots have evaporated, and it is known that rates are going much higher. They always were of course.

This is not the only significant challenge confronting the US equity market. The economy, though having a sunny day, likely remains in the midst of a cool winter. The possibility of escalation in Ukraine can never be fully ruled out. Suddenly, China has ratcheted its diplomatic posturing significantly higher in response to what it sees as an unreasonable and aggressive Biden administration.

The end result will be yet lower earnings risk through the year. Though first quarter outcomes could be shaping up to be perhaps a little better than many had feared. It is likely, in the context of a a renewed aggressive vigour on the part of the Federal Reserve however, that any blip in earnings will be quickly discounted by the market.

It therefore remains appropriate to continue to view current stock valuations with some caution. The US equity market most likely has a long period of stormy weather ahead of it, before any lasting sunshine can be hoped for.

Clifford Bennett

ACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.