What the heck just happened in the stock market on Wednesday? It suddenly rose from the ashes and lifted itself toward the heavens, like a Phoenix rising from the dead.
The media suggested yesterday that the market rallied because Chairman Pow! walked back his thinking from October that interest rates were way below neutral. Supposedly those words triggered the October crash. The media said that traders thought that meant that the Fed would keep hiking rates through 2019.
But yesterday, the take on Powell’s speech was that he said that rates were now close to neutral, which CNBC characterized as a “change in tone.” That was ostensibly the reason for the 62 point rally in the S&P, which translated to a nice little attention grabbing 617 point gain in the Dow. That should get a few retail investors piling back on the train to oblivion.
But as economist Ian Sheppardson pointed out, Powell didn’t say that. The market overreacted, hearing what it wanted to hear. I think his analysis is spot on.
“Markets think Chair Powell said rates are now “just below” neutral. What he actually said was that rates are “just below the broad range of estimates of the level that would be neutral”. This is just a simple statement of fact…
…The “broad range” of FOMC estimates of neutral is 2.5-3.5%, as per the September forecasts. The target range for fed funds now is 2.0-2.25%, so the Fed is just one hike away from the top of the target range hitting the bottom of the neutral range. QED.
But they’re 3 hikes from the middle of the range, and 5 from the top. Powell said nothing to suggest that he or the majority of the FOMC think they’ll be able to stop at the bottom of the range, after just one more hike.
The US labor market, which is what they’re worried about, has not weakened appreciably in recent cycles with real rates less than 2%. Right now, they’re zero, and unemployment is at 49-year low, and falling. The Fed has a lot more to do.
More importantly, interest rates are a red herring. The real problem, as we know, is that the Fed is pulling $50 billion per month out of the banking system and the Treasury simultaneously sucking vast amounts of cash out of the market with $780 billion in new debt sales in the fourth quarter 2018 and first quarter 2019. That giant sucking action will soon suck the life out of this rally.
In the meantime, fellow Sure Moneyans, we have a market meltup. Now there’s a little something that I have noticed time and again in my 50+ years of charting stocks that suggests there was less rising from the ashes than met the eye yesterday.