Jay Powell remains committed to stamping out inflation, even if that means equities will suffer a significant decline.
Heading into December 14, we are at the point where the famed “Santa Rally” in the equity markets has to happen now or it simply cannot happen. Jerome Powell during his press conference today made it very clear that he does not want a Santa rally in the equity markets. He made it very clear that the Fed is going to keep market conditions tight and “use their tools to continue tighten market conditions.” This is in addition to the QT that is ever-present in the background, tightening markets at a steady pace of $95 BN per month.
Santa is not going down without a fight, however. The markets were turbulent to say the least. At the start of the trading day the S&P 500 was solidly in the green, up near 4052. After the Fed released their rate hike decision, the market plummeted rapidly on the news that the terminal rate would be much higher than the markets were pricing. The market sank precipitously on the news, with the S&P down almost -1.2% at the lows. Jay Powell came out for his news conference and as usual, reporters peppered him with questions hoping they would force a slip-up and he would say something that could be interpreted as dovish.
Powell was very clear however, that the Fed is serious about raising rates. The Fed signaled that there would be no rate cuts in 2023 and Jerome Powell said that rates would be “higher for longer than anticipated.” He also stated that inflation is likely to be stickier than previously thought and he is concerned about such a tight labor market and its effect on inflation.
Stock market bulls, hoping for any sort of dovish pivot, tried to push the S&P green. They were successful for a brief period, but the bears eventually took over with the S&P ending at a -.64%.
My take away from FOMC was that even though we have seen a decline in inflation, the FED is working very hard to ensure markets that this inflation fight will continue, regardless of some success in lowering the CPI. I did not sense anything in the meeting that was at all dovish in tone, or bullish for equity markets.
Until we see a significant shift in Powell’s tone, I think the Fed is going to defeat the Santa Claus Rally this year. I forecast a significant decline in the S&P 500 over the next few months. It looks like Santa will be skipping Christmas this year.
-Russell
**As Always, this article was not financial advice. For financial advice, please consult with a licensed financial advisor for your particular financial situation.**
