In Q2 GDP was negative. But wait, Powell made it a point that we are not in a recession, that the Fed doesn’t want a recession, and that we don’t have to have a recession. Got it? asks Kelley Wright, editor of Investment Quality Trends.
So, if you are wondering why the market is in a frenzied rally, there you have it. In 2019 the Fed got weak kneed and backed off, and all the traders know it. Guess what? They are betting big time the Fed will back off again. Buy, buy, buy!
One problem though, in 2019 the Fed’s balance sheet was only $4 trillion, now it is more than double that. Inflation is a beast, and you don’t kill a beast by tip toeing around it and hoping it will get bored and go away. You have to drive a stake through its heart and kill it. Paul Volker knew that. Arthur Burns, the Fed Chair prior to Volker should have known it.
Powell better figure it out; I might turn out to be wrong, but I doubt that a 2.50% to 3.25% Fed Funds rate is going to get the job done. There are just too many years of insane monetary policy and fiscal spending to do away with.
If I were a betting man I would bet that inflation doesn’t cool down as much and as fast as bond traders do, which means I think the Fed will have to hike further than the bond market and stock traders are projecting through their panic buying.
Accordingly, if Fed policy is truly neutral, then any further hikes will be restrictive, and something, more than likely, will get broken. In the interim I would take advantage of this rally to unload anything at or within the Overvalued area you failed to sell before the decline, because I don’t think this bear market is over. Clearly a lot of participants do, but I don’t think they have experienced a real bear market.
What you are seeing now is a classic, fast, and furious bear market rally, which historically fail when reality raises its ugly head. In January of 1973 the Dow poked its head briefly above the 1966 high, and everyone thought it was the beginning of a new bull market. Over the next eighteen months the Dow declined 50%.
Conversely, I expect that the Undervalued category will offer many opportunities to acquire great, high-quality companies at good present value that you should take advantage of if one fits a need in your portfolio. As long as nothing is fundamentally wrong with the company you will be fine.