- Scott Poore, AIF, AWMA, APMA
Markets Got Run Over By The Fed
For the few weeks, you could have thrown out the fundamentals and just paid attention to what any particular Fed member was saying in any given speech to see which way the market was headed. When dovish comments are made, the market bulls take over.
When the comments are hawkish, the bears rule trading for the day. It kind of reminds me of the holiday hit "Grandma Got Run Over By A Reindeer." The song was originally recorded in 1978 when song writer Randy Brooks played the tune for Elmo Shropshire and Patsy Trigg, the husband and wife recording duo. The song was released in 1979, but it didn't really take off until 3 years later, when it hit the Billboard charts and peaked at #48. The song has been recorded by multiple artists and had been parodied multiple times - kind of like the Fed and their talking points.
"Grandma got run over by a reindeer
Walking home from our house Christmas eve
You can say there's no such thing as Santa
But as for me and Grandpa, we believe
She'd been drinkin' too much egg nog
And we'd begged her not to go (Don't go Grandma)
But she'd forgot her medication
And she stumbled out the door into the snow
When we found her Christmas mornin'
At the scene of the attack (Only tell you something)
She has hoof prints on her forehead
And incriminatin' Claus marks on her back"
Here's what we've seen so far this week...
Grandma Got Run Over By The...Fed. It would be one thing if the Fed speakers were unified and validating fundamental data.
Instead, however, we have members of the Fed and its Chairman either intentionally or unintentionally saying opposite things. It has markets all twisted. Markets were up last week, largely on the dovish comments of some Fed speakers, most notably Mary Daly. On Monday of this week, equities were down 1.5% when the St. Louis Fed's Jim Bullard stated that the Fed "has a ways to go" to end rate hikes. That little statement also sent short-term interest rates higher. By Wednesday (just two days later), Fed Chairman Powell stated, "The time for moderating the pace of rate increases may come as soon as the December meeting."
His comments pushed the S&P 500 Index higher by 3.1% after it had been trading lower most of the day until his speech. Rates also declined based on his comments. If we look at the SKEW Index, which measures the tail-risk in the S&P 500, it has jumped and plummeted as Fed speakers have gone back-and-forth on dovish and hawkish comments. Today markets are lower on the news that the Labor Market held up well in November. At least 263,000 jobs were added in November, which is more than the market expected and higher than October’s number before it was revised higher. The market seems to have amnesia from just two days ago when Powell stated that it’s likely time to moderate the pace of rate increases because trading is down so far today. Why? Because investors fear a solid jobs report means the Fed will still have more room to raise rates. This is the environment the Fed has caused with the back-and-forth terminology. It makes one wonder if Powell is the leader of the most powerful monetary body in the world or just "Buddy The Elf" who couldn’t decide whether he was an elf or not.
You Can Say There's No Such Thing As...The Consumer. If we have learned anything this year it's that the consumer has been resilient.
Higher inflation and higher interest rates has not prevented the consumer from keeping the economy buoyed. Expectations for this year's holiday spending was lukewarm. So far, it's good news on the consumption front. Black Friday's online sales last week topped $9 billion, which beat forecasts and was up 2% over last year. Cyber Monday followed that up this week with another $11.3 billion in sales online which is higher by 5.8% over last year.
We've talked a lot about Redbook Sales (same-store sales at over 9,000 U.S. retailers) which saw a year-over-year jump of 10.4% (well above the norm). Today, we learned that October Personal Income was +0.7%, beating expectations of +0.4% and higher than September's +0.4%. Personal Spending was higher by 0.8%, in-line with expectations and also higher than September's reading of +0.6%. Both measurements are higher than at this same time period last year. Well, that must be inflation you say? Real Personal Consumption (adjusted for inflation) was also higher in October (+0.5%) than in September (+0.3%). As long as the consumer has money in their pockets and a willingness to spend, economic growth will follow.
But As For Me And Grandpa, We Believe. In a recent press conference this week, Matt Rhule, the new head football coach of the Nebraska Cornhuskers, was asked about his experience with the NFL Carolina Panthers and his tenure as their head coach. I love his answer about the reason behind his being let go:
"It’s a great place with wonderful people, but I just don’t know if I was a fit there. We talked about having a four-year or five-year plan. If you tell me we’ve got a two-year plan, then I’m gonna go sign a bunch of free agents and do it. What was a four-year plan became a two-year-and-five-game plan real quick.”
Investors are often like NFL owners - they forget about the plan as soon as things get tough. In the case of Matt Rhule, he turned around losing programs at both Temple and Baylor. It took a little time as both programs were in the gutter, but by year 3 at both he was winning 10 and 11 games per year.
At Carolina in 2019, the team had won 5 games the year before Rhule got there. Rhule matched those win totals in 2020 & 2021 (doing no worse, mind you, than his predecessor). But, when the heat got turned up by fans and the media, his owner, as Rhule stated, changed the plan on him midstream. Clients need to understand that they shouldn't abandon their financial plan when the market turns lower and things look bad on a particular statement. The long-term plan should be kept in place even though things don't look great. The S&P 500 Index is up 13.6% since the low of September 30th. Clients that abandon the plan now and go to cash are only locking in their losses and will miss the opportunities ahead. By the way, the S&P 500 Index has closed two consecutive days above its 200-day Moving Average, something it hasn't done since April of this year, so the book on 2022 isn't written just yet.
Oh, and as for our friend Matt Rhule, as Ted Lasso would say, "Guys have underestimated me my whole life." We'll see how the Cornhuskers fare in a year or two. Maybe their administration will be patient enough to stick to the plan.
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