How Britain helped U.S. markets yesterday … Luke Lango sees a major shift in expectation helping stocks … why Eric Fry thinks it’s time to “buy the fact”
Yesterday, markets surged, with the S&P, Dow, and Nasdaq climbing, respectively, 2.7%, 1.9%, and 3.4%.Platinum Growth Club Flash Alert podcast:
The gains are continuing as I write Tuesday at lunch, with all three indexes up roughly 1%. As we highlighted in yesterday’s Digest, a reversal of bearish sentiment is driving this rally. And a big part of the newly optimistic sentiment comes from traders breathing a sigh of relief about the latest turn in the drama in Britain. To understand what’s happening, let’s turn to legendary growth investor, Louis Navellier. From yesterday’sWhen we had that spectacular short-covering rally the first two business days of October, that was caused by the Bank of England intervening, driving their bond yields from 5% to 4%.
The reason their bond yields were rising was fear of inflation, and fear of their new Prime Minister Liz Truss’ proposal to stimulate the economy by providing energy price relief – because the utility bills in Britain are very high – as well as provide tax cuts to stimulate the economy.Let’s fill in a few details.
Britain is facing historic inflation, a major economic slowdown, and soaring energy costs
To ease the economic pain for citizens, a couple weeks ago, the recently-elected Liz Truss government announced the most aggressive tax cut plan in 50 years.
Those tax cuts, amounting to nearly 45 billion pounds, would have come at a time when the U.K. government is already shelling out more than 60 billion pounds to subsidize gas and electricity bills for households. Far less tax revenue coming in and far greater financial obligations going out is not an economically healthy combination. It would have put the U.K. government under massive financial strain. Bond traders saw this as a monstrous government debt load during a time of climbing interest rates, massive energy subsidization, and high inflation, and concluded: “credit crisis.” The pound nosedived, British investment markets went berserk, a great many pension funds found themselves on the verge of insolvency, and the Bank of England had to step in to avoid a financial meltdown. Back to Louis:The Bank of England did, of course intervene, but said they were only going to do it for a few days. So, all the U.K. pension funds dumped their bonds. And bonds yields went right back up to 5%.
Well, now they have a new Chancellor of the Exchequer, which is their Treasury Minister – Jeremy Hunt. He is proposing scrapping most of Liz Truss’ tax cuts. And he wants to provide not as much energy relief. They’re still going to provide some, but not as much. In response, bond yields are down well over 40 basis points [yesterday]. They’re under 4%. So, as far as the financial markets are concerned, the financial crisis is averted.What does all this mean for your portfolio?
Here’s Louis’ big takeaway, highlighting the primary driver of today’s market:Bonds are in control of the financial markets today.
The bond market has been jerking the stock market around. So, when bond yields rise, [stocks] go down. When yields fall, like [they did yesterday], stocks calm down. So, that is why the market rallied [yesterday].Meanwhile, Luke Lango is pointing toward a shift from Wall Street that could pave the way for a sustained market rally
In the short-term, what causes prices to rise or fall?
It’s the disconnect between what was expected to happen and what actually happened. For example, say earnings were expected to be $1.50 per share, but they come in at $1.85 per share – investors are pleasantly surprised and the stock leaps. Or perhaps revenues are expected to be $2B but they come in at $1.7B – investors are disappointed and the stock falls. That gap between expectation and reality pushes stock prices all over the place from day to day. Here in 2022, Wall Street hasn’t taken the Fed at its word. It has expected the Fed’s actions to be less severe than its words. Unfortunately, this gap between expectation and reality has set the stage for major selloffs all year long as Wall Street has been disappointed time and time again. Earlier this month, we called out this dynamic here in the Digest. We highlighted Federal Reserve Chairman Jerome Powell at his post-FOMC press conference saying the median projection for the appropriate level of the federal funds rate is 4.4 percent at the end of this year. But was Wall Street pricing the market for this level? Nope. It was betting the Fed would stop at a lower level.Back to our Digest on 10/3 for our takeaway:
Wall Street just won’t take Jay Powell at his word.
It’s understandable since his word carries the stain of “transitory inflation.” But still – such willful disbelief sets up stocks for more downward pressure if/when Powell & Co. are true to their word, and it “surprises” Wall Street.Well, it looks like Wall Street has finally had enough, and is now taking Powell and the Fed at their word. This sets the stage for long-awaited positive surprise between expectation and reality.Hypergrowth Investing:
For more on this let’s jump to our hypergrowth expert Luke Lango. From yesterday’s issue ofThe market is finally priced for peak hawkishness.
For months, traders simply weren’t believing the Fed when it said – over and over again – that it would keep hiking rates all the way to the 4.5% to 5% range. This has left stocks vulnerable to hawkish surprises, which is exactly what has happened… But guess where we are today? The futures market is at a 4.95% Fed rate. In other words, Wall Street is finally on the same page as the Fed.We can get a better sense for this by looking at the CME Group’s FedWatch Tool
This shows us the probabilities that traders are assigning to different fed funds levels at various points in time.
If we look out to March of next year, we find that a whopping 42.6% of traders are banking on the Fed Funds rate coming in at 4.75% – 5%, echoing what Luke wrote. A solid 35% are estimating it will be higher, at 5.00% to 5.25%. Some are even going all the way up to 5.25% – 5.50%.
This shift is huge – and very supportive of market gains.
Here’s Luke to explain why:That leaves very little room for any more hawkish surprises and a ton of room for dovish surprises in the event that inflation does cool.
The data suggest inflation will cool. As it does, the Fed will likely deviate in a dovish manner from forecasted policy. With the market priced for the forecast, this dovish pivot will inject firepower into the stock market.Our macro expert Eric Fry just made a similar point about positive surprises
From Eric’s latest issue of Investment Report:
Although the collective investor psyche may not have reached what legendary investor Sir John Templeton called “the point of maximum pessimism,” very few investors are wearing rose-colored glasses and looking for rainbows and unicorns.
Pessimism and anxiety are widespread. Investors have become so accustomed to downbeat news that they are unprepared for the good. But that’s exactly what could be coming our way soon… or at least less-bad news.Eric expects the upcoming inflation readings to decline faster than most folks currently believe. Given this, he’s looking for the Fed to hike rates less aggressively next year than most investors expect.
Translation – finally, a “positive” gap between expectation and reality. Here’s Eric’s optimistic bottom line:I believe we have drawn close to that critical inflection point – the moment when we investors should stop selling the rumor… and begin buying the fact…
To be sure, investing during a deep bear market is a messy, chaotic, and nerve-racking endeavor. But these gut-wrenching moments are the ones that provide outstanding gains… eventually.Before we sign off, a quick heads-up
There’s another Crypto Cash Calendar event happening today. If you’re new to the Digest, here are our crypto experts Luke Lango and Charlie Shrem to explain what this is:
Crypto is the future. But that doesn’t mean all cryptocurrencies are the future.
To sift through all the blockchain noise, we’ve put together an exclusive team of crypto engineers and coders to collectively research, analyze, and understand the core technologies underlying the cryptocurrency revolution. Informed by this research, we’re able to interpret the usefulness and potential impacts of those technologies. Here’s how it works: Behind the scenes, our proprietary research system gathers information and indicates which altcoins and crypto events are of particular interest. From there, we’ll share with you the most exciting and promising of those coins and events in our Crypto Cash Calendar.Just this morning, Luke and Charlie announced an event that’s triggered their Crypto Cash Calendar system.
Here’s more from Luke on this specific opportunity:Today’s crypto has proven it can handle over a quarter-million transactions per day, all without the incredulous fees Ethereum (ETH-USD) has. What’s more, it has solid funding and hopes to encompass projects of all kinds, ranging from sports collectibles and music NFTs, all the way to video games and DAOs. With the NFT market still growing, its potential to 10X from here is high.
You can read more about this crypto right here. Have a good evening,
Jeff Remsburg