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Powell Appeases the Market… Or Does He?
For me, there were two (big) questions for the Powell this week: (1) are rate hikes off the table – given faster-than-expected inflation and continuing economic strength? and (2) when will the Fed commence QT tapering (and by how much)? Powell was unequivocal on possible rate hikes… forghedaboudit. Equities cheered. But why remove optionality? Why Powell is so convinced we don’t see a re-acceleration in inflation? Admittedly it’s a lower probability outcome… but we can’t rule it out. But he apparently can…
‘AI’ Trumps the Fed, Inflation and the Economy
The Artificial Intelligence (AI) narrative continues to dominate sentiment. Whether it was Google, Meta or Microsoft… the (AI) earnings script was similar. Mega-cap tech companies so far have reported impressive earnings and revenue growth with respect to their AI strategies (across online ads, cloud and search). It was music to investor’s ears. However, strength in tech earnings isn’t necessary conflating to strength elsewhere. To that end, there is a strong bifurcation with earnings… and that raises some questions.
Risk vs Reward
Warren Buffett once told us “the stock market is a device for transferring money from the impatient to the patient”. Which one are you? And while it sounds cliché, the power of patience is real. We need patience for two things: (i) allow our existing investments to work over time; and also (b) if buying, waiting for prices to come to us (eliminating FOMO). For example, some investors may have felt left out the past three months (I certainly did) – as ‘hot’ momentum stocks like Nvidia, Netflix, Meta and others surged. Fundamentals were not front of mind – where investors thought nothing of paying 40x plus earnings. The momentum trade had taken hold. But as we know – things inevitably revert to the mean.
Things Looking Better – But More to Do
For 23 straight weeks (from late October) – the market has effectively gone straight up. It added ~$12T in market cap with barely a pause – a rally for the ages. Now for ten of those weeks, it was in overbought territory – where the (weekly) Relative Strength Index (RSI) traded above 70. I cautioned readers of a likely (technical) correction. And whilst I stressed the market can remain overbought for several weeks (and it did) – it’s also an area to be cautious. This is where sell-offs start. And it seems we could be seeing the start of a 7-10% correction… however it’s still early.