Stocks ripped higher again this morning following a wild trading session yesterday that saw sentiment whipsaw several times. The Dow, S&P, and Nasdaq Composite all gained in response to a speech from Fed Chairman Jerome Powell that turned surprisingly dovish near its conclusion.
Tech led the way today while most other sectors followed as better-than-expected Meta (NASDAQ: META) guidance, revealed last evening, sparked an enormous 25% META rally.
The Fed met expectations yesterday, uncorking a 25 basis point rate hike. What the market wasn’t prepared for, however, were Powell’s initially hawkish remarks.
Powell said that the full effects of tightening had yet to be felt in the US even though the economy “slowed significantly” last year. Shares fell slightly before Powell hammered stocks lower as he dialed up the hawkishness.
The Fed chairman then listed off several pessimistic soundbites like “we continue to anticipate that ongoing increases will be appropriate” and “restoring price stability will likely require maintaining a restrictive stance for quite some time.”
“We’re talking about a couple of more rate hikes,” continued Powell, insisting that there are no “grounds for complacency” due to an “out of balance” labor market.
Ouch.
Stocks collapsed lower after rallying slightly on the 25 basis point hike. Then, everything changed when Powell seemingly shrugged off the recent loosening of financial conditions. Analysts were waiting for an indication from Powell that the Fed would attempt to tighten in the short term.
No such comments were made. Powell then galvanized bulls further:
“We can now say for the first time that the disinflationary process has started. We can see that, and we see it really in goods prices so far,” he said.
The S&P soared, rising as much as 1.70% on the day as the dollar dumped. Yields plunged, too, flattening the yield curve to the point at which several spreads hit record inversions. Gold spiked above $1,950 per oz, reaching a high unseen since April last year.
It’s clear now that investors are anticipating a rate cut at some point, even though Powell didn’t explicitly say one’s coming. Ignoring loosening financial conditions, which are incidentally looser than when Powell crushed markets at Jackson Hole last year, was evidence enough for traders.
“I see no signs yet that the Fed is open to 2023 rate cuts,” said Brandywine Global portfolio manager Bill Zox.
“I’m not sure the Fed is even trying for a soft landing. While they would never say so, they might prefer the restorative aspects of a recession and a proper bear market.”
We’ll find out soon whether Powell intended to deliver such a dovish message today. If Fed officials come out next week and pour cold water on the rally, that’s a surefire sign that Powell meant to be a hawk. It’s happened before, and it could happen again.
We may also see a hawkish shift if equities continue their melt-up. Google-parent Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), and Apple (NASDAQ: AAPL) all report earnings after the closing bell this afternoon. Yesterday, META started the party early with a $40 billion stock buyback and upward guidance revision.
If the rest of the Big Tech stocks unveil similarly bullish reports, the tech rally – and broader market rally – could get even more severe.
“It’s showing that growth is outperforming value as it unwinds some of the pressures that hawkish rhetoric brought to risk markets over the course of 2022,” said GLOBALT Investments portfolio manager Keith Buchanan, referencing the major tech surge of the last few weeks.
Following tech earnings is the jobs report, due out tomorrow morning. A “goldilocks” report would include a moderately below consensus headline jobs number and weak wage inflation. If Big Tech earnings deliver alongside a “just right” jobs report, the rally could go nuclear Friday morning.
Don’t be surprised if the Nasdaq Composite enjoys one of its biggest gaps higher at the open in response.
On the other hand, a whole lot would have to go right for this to occur. But these days, everything’s coming up bullish. And investors have arguably never been less rational than they currently are.
That’s a deadly combination for bears, who will probably be proven right once this rally cools. Until then, though, short sellers should prepare to endure additional pain – not less – as more potential “rally fuel” awaits.
