Pardon the reference to the great Earth, Wind and Fire lyrics but yesterday’s performance by Fed chair Powell was uber hawkish, lots of tough talk about rates and inflation and the path forward. Not really a lot good to take out of it so I won’t try. I wish he was half as tough last January/February 2022 when the Fed lost market confidence and got behind against inflation by 3 touchdowns on the road. A better narrative yesterday might have been to focus on progress to date with regards to inflation (it’s coming down across the board), demand destruction (it’s happening with regards to housing and rents and commodities and consumer spending), and the impact of tighter financial conditions (yields higher, USD higher, credit spreads wider – all helping eliminate bad speculative behavior of the summer of 2021). But that wasn’t how yesterday’s show went down. I am convinced that a very weak labor report looms in front of us and the Fed will be to blame when its comes to a recession in early 2023. The Fed has gone from doing nothing to doing too much. I think the Fed will be forced to cut interest rates by mid 2023. The Fed under Powell never misses an opportunity to miss an opportunity. I’ll give him a D- on his report card.
The popularity about being negative with regards to the market is all consuming. Investor sentiment has been extinguished/obliterated/annihilated. This cannot be downplayed. A look at the AAII Bull/Bear survey dating back to 1987 says current extreme bearish readings have only occurred .2% over the past 35 years. Bearish readings now exceed 60 – which NEVER happens. The last time we got such a bearish reading was early March 2009 (within days of the bottom of the Great Financial Crisis). While the last 13 years have been a great bull market run, don’t forget that tough times did exist during this period, including the August 2011 US treasury debt downgrade, summer 2016 Brexit, and, of course, March 2020 and COVID. The current bearishness reading greatly exceeds all of these other rather rough observations. It’s gotten very cool to be very negative on owning risk assets.
But data is data and we looked at all the other times bearish readings exceeded >60 and what FORWARD returns from such moments of bearishness. Such readings only have occurred .2% of the time, but a look at what FORWARD returns look like 1year out, 2years out, 3years out from such bearish moments speak volumes about extreme sentiment and forward returns. .2% of the time it works all the time.
Chief Investment Officer
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