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Our Experts Weigh in on the “Fed Pivot”

Will we see a “Fed Pivot”? Here are the answers from Louis Navellier, Eric Fry, Luke Lango, and John Jagerson

We can’t say that the Fed will change course, but we can say that the pressures on the Fed to change course are intensifying.Here are a few examples of global cracks and central bank surprises from the past week:

  • The Bank of England had to stave off a “Lehman light” economic meltdown over in Britain
  • The United Nations warned Federal Reserve Chairman Jerome Powell that he must change course or else he’ll throw the developing world under the bus
  • Australia’s central bank blinked, and increased interest rates by a smaller amount than expected
  • Talking heads like Jeremy Siegel are admonishing the Fed, saying “the Fed needs to go slower”
  • New data show a slowing economy, such as August’s Job Openings and Labor Turnover Survey (“JOLTS”) report. It showed the lowest number of job openings since June of last year
  • Poland’s central bank followed Australia’s, surprising economists – this time by not hiking rates at all

This expanding list is resulting in fresh hopes of a Fed Pivot. This is what led to the blistering market rally on Monday and Tuesday, as well as yesterday’s recovery that saw the markets regain most of what were big losses in the morning.So, where does this leave us? Are we, in fact, on the verge of an about-face from the Fed? And what does that mean for the market in the near future?Over the last two days, I put these questions to our top InvestorPlace analysts: Louis Navellier, Eric Fry, Luke Lango, and John Jagerson. Today, we’ll get their responses.There’s lots to cover, so let’s jump straight in.

Louis Navellier: “The market has been rallying on a narrative I don’t like”

Louis said that Monday and Tuesday were too much of a good thing. Stocks got ahead of themselves. This means the market is likely to back up.As to the Fed Pivot, here’s Louis top-line take:

The market has been rallying on a narrative I don’t like – that the Fed might only increase interest rates 50 basis-points in November.I’m sorry to tell you that, but when the Fed telegraphs what they’re going to do, they tend to do it. The only reason they change their mind is if there’s shocking economic news.So, Wall Street is now rooting for weak economic news. They liked the ISM report on Monday because it wasn’t that strong. They’re rooting for a weak payroll report on Friday.So, bad news is supposed to be goods because it might stop the Fed from raising rates.But that narrative is coming from overseas.

Louis points to falling global interest rates, as well as the central bank surprises from Australia and Poland that we noted a moment ago. He says that everyone is now thinking that maybe the Fed won’t raise rates as much.Here’s Louis’ response:

That is just an incorrect narrative. Speculating that the Fed will diverge from its guidance is dangerous.

But what about the new pressures on the Fed? For instance, the United Nations commentary?Here’s Louis’ take:

I think the Fed and other central banks will ignore the UN, since they all have inflation mandates that they must comply with.

Put it all together, and Louis is decidedly not in the “immediate Fed Pivot” camp.

Eric Fry: “I believe we have drawn close to that inflection point – the point when bad news is good news for stocks”

Without speaking directly to the “Fed Pivot” speculation, Eric believes we’re at, or rapidly approaching, the point at which buying into this market is the right call.From Eric:

For months, we have been selling the related rumors that stubbornly high inflation would cause the Fed to hike short-term interest rates until the economy slips into recession.But with the last, aggressive rate hike and Chairman Powell’s equally aggressive posturing about future rate hikes, these rumors are rumors no more. They are facts.Inflation is still a problem. The Fed will be raising rates well into next year. The economy is slowing.

Eric then recaps the pain that this has caused in the investment markets here in 2022, concluding that so much of today’s bad news has now been priced into stocks.Here’s how he sees things as a result:

I suspect we have drawn close to the moment when we investors should stop selling the rumor… and buy the fact.Investors have become so accustomed to downbeat news that they are unprepared for good news. But that’s exactly what could be coming our way soon… or at least less-bad news.I expect inflation readings to decline faster than most folks currently expect. As a result, I expect the Fed to hike rates less aggressively next year than most folks currently expect.

Plus, Eric points out that stocks can still perform well even as rates continue to climb. Historically, that’s been the case.To illustrate, Eric highlights the Fed’s eight major rate-hike campaigns (excluding the current one) over the last 45 years. During each one of those campaigns, the stock market rallied.So, while Eric didn’t speak directly to the chance of an immediate Fed Pivot, here’s his broader, more significant takeaway:

I expect the stock market to post a strongly positive return between today and the end of the current rate-hike cycle.Perhaps stocks will waffle for a while longer, but I believe the time has come to stop selling the rumor… and start buying the fact.

Luke Lango: “The market has been burned by falsely hoping for a Fed Pivot multiple times before in 2022, and we think this time is no different”

Luke is about as bullish as you can be on stocks over the next 12 months. But that doesn’t mean he’s buying into the “immediate Fed Pivot” narrative.After pointing out how the market has been re-romancing the idea of a Fed pivot this week, Luke refocuses on what we know for sure: the Fed has sounded very hawkish for weeks – and ignoring that would be dangerous.Here he is with more, speaking specifically about the monster rally on Monday and Tuesday:

Look at how fast everything re-inflates on just faint hopes for a Fed pivot. Stocks surge. Bonds surge. Commodity prices surge.If the Fed pivots now, inflation will make a nasty comeback, and we will be in a worse situation in a year.The Fed knows this, and they also know that while the economic data is weakening, nothing has broken yet.Importantly, the labor and credit markets are still functioning. Until one of those breaks, the Fed will keep hiking rates.

So, what does all this mean for stock market direction in the coming months? Fortunately, Luke draws us a detailed roadmap of what’s on the way:

No pivot coming in November. Once the market realizes this, we will take another leg lower, and the market will likely finally throw in the towel on hoping for a Fed pivot. Then, that’s when the Fed will actually pivot — when all hope seems lost.We see the Fed hiking rates 125bps into December, as they’ve forecasted, and the SPX falling to the 3400 range.At that point, the credit markets will likely be close to breaking, while the labor market will be on the verge of collapse.Then, the Fed will finally come to the rescue in December 2022 like they did in December 2018.No rate hikes in 2023. Massive risk-on rally.  In short, don’t be fooled by false hopes of a Fed pivot today. It’s coming, yes, and soon. But not now.We’re still one good final crash in the bond, commodity, and stock markets before the Fed capitulates, and stocks stage an enormous comeback in 2023. 

John Jagerson: “I think there is still enough bad, bad news coming this quarter that the market isn’t likely to reverse yet”

As did Louis and Eric, John points out that Wall Street is now back in the “bad news is good news” camp.He connects today’s market conditions to those of late fourth quarter 2018 and first quarter 2019. That’s when traders started looking forward to bad news in hopes it might spur the Fed to take some action.Here’s John with how things played out back then:

The Fed started to telegraph to the market that they would cut rates (which they did in August) and share prices moved up quickly.The corollary in today’s market is that very moderate bad news (lower ISM on Monday, and lower job openings Tuesday) is greeted with enthusiasm by bulls because they believe the Fed will be more accommodative and raise rates more slowly, or pause.

But, like the rest of our analysts, John is hesitant to buy into this immediate “pivot” hope. That said, he doesn’t see the market as being too far away from a real turn.Back to John:

I think there is still enough bad, bad news coming this quarter that the market isn’t likely to reverse yet, but later in the fourth quarter as long as labor numbers are still stable, a prolonged move higher seems likely.

Putting it all together

Viewing the responses as a whole, a few common themes stand out:

  1. These hopes of an immediate Fed Pivot will be disappointed
  2. The most probable market direction for the immediate future is down after Wall Street realizes it’s not going to get its way
  3. Bigger picture, we’re nearing a major inflection point in the market. Beyond this short-term selling pressure – which could be significant – a major move higher is fast approaching

We’ll keep you updated as the thinking from our experts evolves.Have a good evening,Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2022/10/our-experts-weigh-in-on-the-fed-pivot/.

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