In this weekend's 313th edition of Turning Points we have 15 pages of data going over why a majority of investors are getting the relationship between the Fed and the markets completely wrong, along with how to capitalize in the months ahead.
MARKET UPDATE
There are a handful of emerging themes that I expect will be gaining momentum in the months ahead among investors. The most significant of which is the fact that Fed rhetoric and market direction can function independently of one another.
The greatest liability among investors presently is that a vast majority believe that the Fed is the ultimate arbiter of market direction according to both their language and their policy decisions.
This deeply ingrained belief among investors will cost them the ability to act rationally in the months to come as the markets once again take the path least expected by running up into a Fed pause, with a distinct possibility of a top being seen in and around the time the Fed actually begins to cut rates.
In other words, the entire script of the 2009-2021 bull market will be flipped on its head moving forward.
Investors have become much too comfortable with the “just follow the Fed” mantra, believing that by simply waiting until the Fed is finished hiking, they can conveniently buy the S&P around current levels, taking further confidence that the Fed may actually cut rates at some points, boosting the S&P to new highs while investors ride their coattails.
If only the markets were so easy.
The CPI data bottom in October also marked a turning point for Fed sensitivity of the market. Since then, we have had numerous Fed speakers, including Powell himself in the post-FOMC decision conference attempt to hit the markets over the head with the hawkish stick....it hasn't worked.
What is going to be especially unnerving for the majority of investors who believe they can simply wait around for the Fed to stop raising rates before allocating their capital is how high the markets can go as the Fed continues hiking rates, albeit with Fed hikes seeing decreasing velocity over the next few meetings.
The chart below encapsulates this point perfectly. This is how the market reacted in 1982 as Volker was near the end of his rate hike cycle:
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