Investors were desperate for even the tiniest bit of good news from Jay Powell, and it shows.
Fund managers were pretty sure the US Federal Reserve would raise interest rates this week by a hike that would have sent us all out just a few months ago. It duly offered an increase of 0.75 percentage points, the second in a row. Those old quarter-point steps are for the weak (and for policymakers who aren’t addressing inflation sailing toward double digits).
The real action, however, was always going to be in Powell’s statement and comments. It didn’t disappoint.
“As the stance of monetary policy tightens further, it will likely be appropriate to hold back the pace of hikes while we assess how our cumulative policy adjustments are impacting the economy and inflation,” the Fed chairman’s statement said. Fed.
Ding ding ding! That was all the market wanted to hear. As the TikTok teenagers of East London might say, “Say less, dear.”
The Nasdaq 100 stock index, a very tech-heavy beast that has suffered greatly as the Fed has turned on the taps, had its best performance in more than two years, up 4% at the end of the day. The benchmark S&P 500 gained 2.6 percent.
We are operating on the basis that some bad news is good, responding positively to the fact that we are seeing some weakness in economic data.
It was all due to “a little help from the Fed,” as Mathieu Racheter, head of equity strategy at Julius Baer, put it. Fears of a relentlessly aggressive Fed and persistent, runaway inflation have been painful for more speculative stocks this year. Now we see the Fed slightly tapping the brakes.
“The peak in inflation expectations and yields strengthens the case for growth stocks,” he said. “We foresee a good tactical opportunity to pick up selective growth names at economic valuation levels.”
Earnings season isn’t shaping up too badly, he added, and while analysts’ expectations for the rest of the year are likely still too optimistic, “this phenomenon is already well understood by the market.” In other words, the bad news is already in the price. It might finally be time to sniff out some deals after a dismal, awful, not-so-good start to 2022.
One day, this will definitely be right. Maybe that day is now. But it takes heroic skill to brush off pretty much everything Powell said. The words about the rising rate of domestication were cut out, but everything else was kind of white noise like when the adults talk in Charlie Brown.
In Franklin Templeton, the tone borders on bemused. “Financial markets only heard what they wanted to hear and ignored the rest,” said Sonal Desai, director of fixed income investments. “I think this just sets the stage for a correction and more volatility ahead.”
Other comments in the same statement from Powell made it clear that “another unusually large increase” in interest rates could still be needed at the next meeting.
“He underlined the persistent strength of the labor market and said that bringing inflation back to target will require slower growth and higher unemployment,” Desai said. “So far, the markets don’t seem to have paid much attention to that part.”
Markets are super receptive to supportive news precisely because this year has been so rough so far. Bank of America’s survey of fund managers, for example, described pessimism levels as “terrible.”
According to survey results announced earlier this month, money managers had received most of their cash portfolios since 9/11. The proportion of fund managers who say they are taking on lower than normal levels of risk stands at 58%, the highest level of caution in the survey’s history.
Even before the Fed’s decision, market moves suggested investors were eager to see the positives in almost anything: good news; news that was somehow less terrible than they feared; or news so bad it could force the Fed to reverse.
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That explains why this week’s data showing the second consecutive quarter of economic contraction in the US left stocks in the green.
“The market has been responding as if we’re nearing the end of synchronized volatility to the downside,” says Steven Oh, head of credit and fixed income at PineBridge Investments. “We are operating on the basis that some bad news is good, responding positively to the fact that we are seeing some weakness in economic data.”
No one wants the economy to deteriorate too much. It’s not good news for humanity (what fund managers think) or, more crudely, for any risk asset class. But if you have that mindset, “you need enough weakness to make the Fed reconsider,” Oh says.
The captivating search for positive market signals of any kind could prove to be a major factor for the markets for the remainder of this year.
“It’s best to focus on not losing money,” says David Older, head of equities at Carmignac. But at the same time, “any breath” of good news could lead to a significant rally from there, he says, even including a peaceful outcome in Ukraine. we can wait A relentless focus on what can go wrong made perfect sense in 2022. But good risk management also means being prepared for what can go right.
katie.martin@ft.com
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