Has The Market Stopped Listening To The Fed?
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
Trading on Wednesday and Thursday stumped some market prognosticators as it seemed to be counter to what the Fed attempted to convey after their February FOMC meeting. Is the Fed trying to move the market or are markets now moving like a feather blowing in the wind? It reminds me of the 1994 hit movie "Forrest Gump." The role of Gump won actor Tom Hanks the Oscar for "Best Actor" in 1995 and the film won "Best Picture," along with a 11 other Oscars that year. The movie grossed $678 million worldwide on an original budget of around $55 million. A success to say the least. Here's some trivia you might not know about the blockbuster movie:
- Several of the logos used in the movie were out-of-date (Apple's garamond logo seen in Lt. Dan's letter to Forrest in 1975 wasn't actually used until 1984); (the Dr. Pepper logo seen in the 1972 New Year's Eve celebration wasn't even created until 1985); (the logo on the Mello Yello can that is found in one of Forrest's first attempts at catching shrimp in 1974 wasn't introduced until 1989 and the drink itself wasn't even available for purchase until 1979).
- One of the extras at Gump's High School in the 1960s is wearing a "Night Ranger" t-shirt. The band wasn't even formed until 1981.
- The reporter on the scene in Washington, D.C. commenting on the Vietnam protests was not an actor. He and his wife were tourists from Atlanta, GA who happened to be on Capital Hill the day of filming and was asked to read the part.
- Gump's journey running across the U.S. was inspired by an actual runner, who in 1982, ran from New Jersey to San Francisco for the American Cancer Society.
- Of those who turned down the role of Forrest Gump were: Bill Murray, John Travolta, and Chevy Chase. The author of the book, Winston Groom, always had envisioned John Goodman as Gump (who is a 300 lb man in the novel).
Here's what we've seen this action-packed week...
I'm Not A Smart Man, But I Know What Moves Markets. I'm not sure the results of trading this week is what the Fed or Chairman Powell had intended. The market was looking for the Fed to remove one key word in their FOMC announcement on Wednesday. The word "ongoing" was not replaced by "further" as markets had hoped with regard to future rate hikes. This leaves the door open for potentially another rate hike after March and maybe another after that. Before Wednesday's announcement, Fed futures showed a 17% probability of no rate hike in March. Today, that probability is zero as a 25 basis point rate hike for March now stands at 99.6%. According to the Fed, future rate hikes will be needed to be "sufficiently restrictive" in order to tame inflation. This hawkish rhetoric should have sent equities in a tailspin, especially as markets have rallied more than 3% since the December 14th rate hike. Instead, markets were up more than 2% over Wednesday & Thursday. However, it was Powell's comments after the FOMC release that gave equities hope, as he stated, "If inflation comes down much faster, we’ll be seeing that, and that will be incorporated into our thinking...we’ll see." Those words helped equities move higher despite some disappointing earnings releases from Big Tech. Yesterday, Apple, Amazon, and Google all turned in Q4 earnings that were below expectations. And yet, markets seem to be anticipating a pause in rates and are taking a "light at the end of the tunnel" view. Is Powell losing his touch, or is he experiencing the life of Forrest Gump in realizing, "Life is like a box of chocolates...you never know what you're gonna get."
Stupid Is As Stupid Does. One of the more puzzling quotes this week from the Fed concerns how much inflation has declined. According to the Fed, "Inflation has eased somewhat, but remains elevated." Somewhat?! I won't repeat our comments from last week, but you can check out our question as to whether the Fed can read a graph. Year-over-year inflation has declined from 9.1% in June to 6.5% just last month. Inflation expectations are down as most American now consider inflation secondary to concerns over government/poor leadership. It's more likely the Fed is trying to tamp down the equity rally, but is having little success so far in 2023. The labor market continues to show resiliency, which means consumers will maintain money in their bank accounts for the foreseeable future. This is also fueling equities as it sets up the possibility of a "soft landing." Both Initial Claims and Continuing Claims beat expectations this week as both metrics were lower. The government's Jobs Report today showed 517,000 jobs added, which blew away expectations of only 185,000 new jobs. Lastly, the Services and Manufacturing Purchasing Managers Indices are showing life and starting to work their way out of the cellar. Next week is a little more calm as there will be fewer economic updates. However, Powell and other Fed governors will address different groups, likely to try and convince markets to curb their enthusiasm. We'll see if equities have finally broken free of each whisper from Powell, or if investors fall back into the same pattern as 2022.
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