Powell’s pivot on inflation turns the trader pandemic playbook on its head
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An American trader works at the New York Stock Exchange in New York on Monday September 20, 2021.
Getty Images| Bloomberg | Getty Images
The market faces a dilemma.
Jerome Powell, Federal Reserve Chair has put a wrench in the investor’s playbook. The omicron variant has been causing concern among investors, slowing down growth and increasing supply chain problems. Investors have been selling tech to offset this fear and buying tech.
Powell is now advising that, due to omicron supply chain problems and ongoing supply chain issues they are becoming more hawkish.
Powell might have used omicron to justify a policy (transitory) that wasn’t useful anymore, but it doesn’t matter.
Market narratives did not include the Fed becoming more hawkish.
Even tech that is highly-priced is now in danger.
Through Covid, the delta variant, and now through omicron, the market has come to believe one thing: Tech wins, no matter what.
Powell said that he wanted to eliminate the term “transitory” and accelerate tapering. This implies that interest rates have risen faster than anticipated. The knee-jerk response should be to sell tech.
What should you do?
That’s the conundrum: Bulls keep saying the consumer is strong, but premature Fed tightening is the great killer of bull markets, so “buy the dip” is getting tougher to argue.
Matt Maley, Miller Tabak equity strategist, stated that “we had been thinking markets were in win-win situations.” If omicron isn’t a problem we can live with it. The Fed will help if it’s a major problem by being even moredovish. All these supply chain problems and variations now lead to them saying that they are going to tighten. Powell is turning everything upside down.”
Still, the recovery continues to be hampered by Delta and Omicron
Also, there’s a problem outside of tech market. It has been in slow motion decline.
Europe and Asia faced new outbreaks of delta virus that hampered stock movement even before the omicron.
Stocks in Hong Kong have fallen to 52-week lows, according to an example. Korea’s stock market is at its 52-week lowest. Japan’s Nikkei has been moving sideways for the past year.
The European market has been experiencing a decline since several weeks prior to the latest delta outbreaks.
European markets (since November 18th)
- STOXX Europe 600 down 7%
- Spain down 7%
- Germany down 6%
- France down 6%
Investors have long been selling cycles in the U.S. on Covid concerns, including energy, and sparing technology.
Since Nov. 24, Markets
- Tech down 1%
- Industrials down 5%
- Energy down 5%
- Banks down 7%
A lot of big names have seen slow declines since their peak for the year, which was many months ago.
Dow Leaders (% of 52-week peak)
- Boeing 29%
- Disney 29%
- Dow Inc. 23%
- Caterpillar 23%
- American Express 19%
- MMM 18%
- Johnson & Johnson 13%
It’s still a fluid environment
As for Powell’s about-face on the “transitory” nature of inflation, Tony Dwyer, Canaccord Genuity’s chief market strategist, told CNBC that the whole supply chain issue was still very fluid and that Powell could just as easily change his tone again. He did a complete flip-flop over the past month so it’s not impossible that this could happen again next year. Dwyer said.
How can tech be a solution? Maley shows us a glimpse of 2020. Maley said, “Rates began moving up in late Summer and technology was at 15% below its highests by the end September.” That was in a much cheaper market than it is today.
All it comes down to your position on long-term interest rates.
Maley stated that if rates are really moving up, it will be difficult to invest in technology stocks. It is important to understand that if you are a firm believer in “Don’t Fight the Fed”, and also realize the high cost of the stock market, you should take profits.
Maley doesn’t have an opinion on the rate at which rates should go. But he does note that “when a price sensitive buyer such as the Federal Reserve exits the bond-buying platform earlier than we thought it would, that should lead to lower prices, and higher yields.”
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