Nothing The Fed Said Last Week Was Bullish For Equities

There.  I said it.  While many have been parsing through the Fed statement or Chair Powell's post meeting press conference looking for clues, it did not take much for me to figure things out.  Of course, the recent Fed speeches, testimony comments were a good tip to their hand.  Just what did they say that has roiled markets?

 

Let's step back first and look at the price action, which had been abysmal leading up to the FOMC meeting last week.  Even on 'Fed Day' (12/15), the Nasdaq was getting punished, bringing the index below the 50 ma for the second day in a row.  When the statement and subsequent press conference occurred the bulls snapped off a sharp two hour rally, closing near the highs of the session.  

 

The Nasdaq performed well, dragged higher by the other indices but the next day lost it all and then some. After rising 2%, the QQQ (nasdaq 100) fell more than 2.5%.  Volatility is here to stay!

 

What in the statement could be making everyone feeling noxious? First, they announced accelerating the taper of bond purchases, hoping to wrap it up by March.  Next, they signaled a distaste for the latest inflation readings, and why not?  The highest readings in CPI in more than 40 years and the PPI the highest gains (9.6%) on record.  

 

Consumers have been feeling the squeeze of higher prices caused by many issues starting with the supply chain problems.  Those issues will eventually be addressed but at what cost?  Recently Chair Powell stated 'transitory' inflation is not happening any longer.  We have to surmise he believes inflation will be more permanent, which is nothing to be happy about.

 

In addition to the taper, the committee is set on hiking rates, much more and much sooner than expected prior.  That will eventually put pressure on bonds but for now the equity markets are going to be re-priced.  What does that mean exactly?  Simply put, the earnings yield, while high under zero interest rate policy will eventually be adjusted lower, and the market multiple as well.  

 

This has nothing to do with the strenth or health of the economy, which seems fine.  But, higher interest rates - even from a lower base - are going to be a headwind to markets as liquidity dries up.  As mentioned prior, the Fed has changed the game - we need to adjust to it.