In his final formal act of 2022 Jerome Powell today raised the Fed Funds Target rate for the sixth time this year — this time by 50bps to 4.50% as widely expected — continuing his efforts to stem the rise of inflation.
The Fed’s press release states, “The Committee anticipates that ongoing increases in the target range will be appropriate… The Committee is strongly committed to returning inflation to its 2 percent objective.”
We will hear from the FOMC Chair again on Feb 1, 2023.
The broader US market has been quite volatile since Nov 30. In light of that I think it’s beneficial to recap the biggest market-moving events of the past couple weeks and view the market’s response via the charts.
On Nov 30, Powell indicated a need for labor, stock, and housing markets to continue to decline to help slow inflation.
“We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.”
“Growth in economic activity has slowed to well below its longer-run trend, and this needs to be sustained.”
On Dec 9, I discussed David Rosenberg’s reasons for concluding that a bear market bottom is not yet in.
There are patterns that constantly reemerge in a recessionary bear market when we are close to the bottom of the cycle. Here are two:
In a recessionary bear market, the market finds its bottom as the recession itself becomes a well known, much talked about fact — this is the time when the market will start pricing in a recovery.
Bear market bottoms tend to occur when the Fed is ~70% into an easing cycle when interest rates have been sufficiently reduced to re-steepen the treasury yield curve; there has never been a period in history when a bear market bottomed while the Fed was still raising rates.
On Dec 13, the CPI print came in close to expectations
Stocks initially rallied after the consumer price index showed an increase of just 0.1% from the previous month, and a gain of 7.1% from a year ago, the Labor Department reported Tuesday. Economists surveyed by Dow Jones had been expecting a 0.3% monthly increase and a 7.3% 12-month increase. Excluding volatile food and energy prices, so-called core CPI rose 0.2% on the month and 6% on an annual basis, compared to respective estimates of 0.3% and 6.1%. Source: CNBC
On Dec 13, I noticed two major geopolitical event occurring simultaneously and to be sure this is not random coincidence. At this time I have no idea the impact on stock markets the world over in the coming months, but these event are certainly worth watching for a variety of reasons.
Taiwan reports record incursion by Chinese bomber aircraft — China has sent a record 18 nuclear-capable H-6 bomber aircraft into Taiwan’s air defense zone, the island’s Defense Ministry said Tuesday, as Beijing continues to step-up pressure on the self-ruled island.
The 18 bombers were part of 21 total Chinese warplanes sent into Taiwan’s southwest air defense identification zone – a buffer of airspace commonly referred to as an ADIZ – in the 24-hour span between Monday morning and Tuesday morning, according to Taiwan’s Defense Ministry.
The ministry said it monitored the situation and employed its fighter jets as well as land-based missile systems to track the Chinese planes.
The flights represent the largest number of H-6 sorties in a 24-hour period since Taipei began releasing daily data on Chinese fighter incursions in 2020.
US finalizing plans to send Patriot missile defense system to Ukraine — The Pentagon is finalizing plans to send Patriot missile batteries that can shoot down incoming missiles to Ukraine, US media reported Tuesday.
As Russia has ramped up missile strikes on key Ukrainian infrastructure, the administration of President Joe Biden could announce the deployment as early as this week, US officials told The New York Times and CNN.
Ukraine's air defenses have played a key role during Russia's invasion, but with Moscow stepping up strikes on energy infrastructure as it faces growing losses on the ground, Kyiv has repeatedly pressed other countries -- especially the United States -- for the Patriot system.
US STOCKS IN TWO CHARTS
Chart #1 below shows the wild intraday swings in equity prices following the events discussed above.
In Chart #2 below we see the bigger picture with an update to the inflection points I recently discussed.
A move of the index above or below the short term resistance-support area may suggest a much larger move follow in that direction.
IMPACT ON INVESTORS AND MY PORTFOLIO
On Nov 29, I revised my macro update slightly.
My base case continues to be that the US stock indexes will see lower lows before this bear market is over; likely in Q1 2023. However, on the back of what is likely to be a more dovish Fed narrative at those lower lows, I feel that stocks may begin an incredible cyclical bull market that could go into 2024.
The time for active management arrived one year ago, and I continue to believe it is here to stay for some years to come. As such I will continue to look for opportunities to be long/short the US indexes against my favorite holdings.
As always I take things one day at a time while looking for the best opportunities to invest while keeping my eyes on the charts to take advantage of moves in both directions, to the extent possible.
My portfolio continues to be structured in a manner that makes it relatively easy to add or subtract equity exposure quickly to take advantage of major inflection points. I hope to continue seeing things in their proper perspective to make the most of those opportunities.; difficult as it may be.
On Jan 1, I will post my next ‘Big Portfolio Refresh’ to provide detail as to my portfolio holdings and refresh my macro outlook.
In the meantime, feel free to see my About page to contact me directly, or use the Substack comment or chat features to keep this discussion going.
Happy holidays to all!