Jay Powell and the FOMC Statement

A few thoughts

Yesterday, I said here that my bet was that Powell and the Fed would turn hawkish. My reasoning mostly was that Biden had stated that he wants inflation under control. Biden is not a POTUS who sees his presidency hinging on the stock market constantly being at ATH.

Fast forward today and as I read the FOMC statement and then began to listen to Powell’s comments and started to get the impression that he was being more dovish than I had assumed they would be. And the market started rocketing upward. But, as Powell got more into his press conference it became clear we were listening to a Fed Chairman that both heard POTUS loud and clear and that can see the data showing us there is way too much cheap money in the system at this time and that cheap money is making for crazy moves in the wealth effect which is driving up the values of assets, which is causing havoc via inflation and runs the risk of creating a huge bubble (we do not have a huge bubble yet).

There is an old saying DON’T FIGHT THE FED. In my life, it has meant don’t question the rising asset prices, when the Fed is lowering interest rates.

And that brings us to the issues of the day. If you are under 50, like me, you’ve never been an investor during a rate hike that was ensuing to combat high inflation. In Econ 101 class, you are told rate hikes are done when economy could possibly over heat and things are generally good. This time the rate hike cycle looks more like Reagan and Volker in 1982. This is course when I was a year old and clearly not thinking about investing.

So where am I now that I’ve had a few minutes to process Powell saying what I had thought he would say? I say don’t fight the Fed. They are, imo, trying to reverse/slow the wealth effect of all the stimulus & other emergency measures due to COVID. My guess is bond yields go up, stocks most STOCKS go down—even more.

I should note too I’ve obviously been extremely bullish on housing. The demographics are so strong that I fully expect the average existing home price on a national level to at least double by end of this decade. I still do. But these moves by the Fed likely ensures it won’t be a quick or straight line up. And that’s a good thing. The housing market is at risk of becoming very unhealthy. It needs to cool off a minute. And hopefully these moves by the Fed begins that process sooner than later.

I wouldn’t at all be surprised to see commodities prices reverse in the coming months. And that holds true for products tied to building houses too. Anything that is text book cyclical, I’m thinking I will be very cautious on adding any shares in those areas at this time.

I’ve also been bullish on energy. A new rate cycle might eventually lead to less oil usage too. But oil is tied with geopolitics (Russia ordeal). My guess is energy will continue to outperform on a relative basis.

The NASDAQ 100? Man, who knows. The Big 4 are so well ran and don’t really qualify as cyclical anymore, imo. It’s just hard for me to envision them getting cut 30%. But the rest of the nasdaq 100 certainly could and much of it already is down this much or more.

Today, I’m thinking stocks continue to both be volatile and trend downward for the next few months. Maybe around Q3, it begins to turn up again. But this is all just some immediate reactions to Powell. And as I continue to process it all, my views here could drastically change again. But that’s where I’m at tonight. I’ve been trying to prepare myself, for quiet sometime, for a different market environment than the one that existed in my late 20s and 30s. But now that it’s actually happening, it’s still a lot to process.