Yesterday morning, investors woke up in a great mood, hopeful that Jerome Powell and the U.S. Federal Reserve were going to save the stock market from its recent crash. But those investors were disappointed because instead of saving the market, Powell and company killed the market.
Consider this: The S&P 500 was up by more than 2% ahead of Powell’s press conference in the afternoon. By the end of the day, the index had dropped into negative territory.
It was a nasty reversal. And to be frank, it was completely warranted.
Powell said all the right things in the Fed’s press release and his prepared remarks — no rate hikes today, very likely rate hike in March; continuing to taper at a steady pace. Balance sheet runoff won’t happen until after liftoff.
All the right stuff — but when left to his own devices in the Q&A section, Powell spooked the markets with an unusually hawkish tone, telling investors that this is a Fed that’s ready to tighten aggressively and quickly.
Specifically, he said that the Fed had plenty of room to hike interest rates without damaging the labor market, will respond aggressively in the event that inflation proves sticky in 2022 (which he hinted is probable) and will likely reduce its balance sheet holdings sooner — and faster — than the previous runoff.
None of that is good news for the stock market. Unsurprisingly, in response to the Q&A session, bond yields soared, and stocks plunged.
The market response has left many investors searching for answers. The Fed was supposed to save the market — not kill it. Now what?
Believe it or not, now — or rather, very soon — is the time to get bullish…
For reference, we saw this coming all along. We’ve been telling subscribers to our flagship investment research advisory Innovation Investor for weeks that the Fed was going to disappoint the market, mostly because this is a data-driven Fed. And the data today shows that a rate hike is warranted.
However, we’ve also reiterated a bullish outlook on the markets. That’s because we believe this Fed will turn dovish by the summer.
The reality is that the economy is slowing, supply chain pressures are peaking and inflation strains are starting to abate.
The economic slowdown is apparent in the Citigroup Economic Surprise Index, which has declined meaningfully over the past few weeks. It is also evident in the New York Fed’s Weekly Economic Index, which has continued to moderate over the past few weeks as well. The peaking supply chain pressures are clear in the New York Fed’s Global Supply Chain Pressure Index, which is starting to allay. And the cooling inflation trends are showing up in PMI readings, which point to easing price pressures.
All of these trends are happening, but they’ve also just started. They haven’t been around long enough and haven’t been sharp enough for the Fed to change its policy stance… yet.
However, we fully expect all three of these trends to persist and even accelerate in February, March and April. Therefore, by the Fed’s May meeting — and potentially even by the March meeting — the prevailing data will paint a much different picture of the economy than what it’s looking at today. Today, we have a hot economy with hot inflation. By March or April, we will have a slowing economy with decelerating inflation.
In the press conference yesterday, Powell importantly emphasized that the Fed will remain “humble” and “nimble,” and will adjust monetary policy according to the data. And if the data meaningfully changes by the second quarter (as we expect it to), then the Fed’s policy stance will change, too.
Therefore, our outlook for the market is actually bullish.
How to Proceed
Stocks will remain highly volatile and choppy until the issues of inflation and the Fed are resolved. We expect positive resolution in Q2, with falling headline inflation numbers in March or April and a more dovish-sounding Fed in its March and May meetings.
Markets are forward-looking. They will likely rebound in advance of those events. And that’s why now is a great time to hunker down in your highest-conviction stocks and just be patient.
And that brings us to the million-dollar question: What stocks should you buy today?
Growth was hit hardest on the market selloff, and they will be the biggest winners on the market rebound.
In particular, there is one growth stock that has been crushed. And we honestly believe it represents a 10X (or greater) opportunity from current levels.
You can check it out here, along with all the key details — like its company name, ticker symbol and business details — for free!
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.