Lucy Has Pulled The Football.

For years, corporate America and stock market investors could rely on the Federal Reserve to have their back. Ridiculously low borrowing costs turbo-charged stock prices - especially those of profitless (and sometimes mindless) tech companies. The Fed’s interests were aligned with those of the likes of Apple, Tesla and Microsoft but also with those of regular people pouring money in their 401k every two weeks. The Fed’s extended purchases of mortgage bonds drove up home prices, delighting homeowners. Everyone was a winner. Well, everyone except would-be first time home buyers who watched prices soar out of their reach and savers and those living on fixed income investments for whom income dried to up pretty much zero. A whole generation of stock market participants learned to reduce their investment time horizon from decades to hours. Others learned to sink money into all sorts of nonsense and some even made a quick buck out of it for a while. This was all brought about by the orgy of easy money that the Fed created. But Lucy has now pulled the football. The stock market’s ex-sugar-daddy has deleted and blocked its phone number. The Fed’s job has never been to prop up the stock market, it just so happened that, for a good while there, the interests of the two were joined at the hip. But not any more. The cavalry ain’t coming this time. Markets were due for a relief bounce following the steep declines of the past couple of weeks, and that started happening on Monday as there were some light positives from corporate earnings and guidance (Ralph Lauren, RL), while old school BTFD’ers and short-covering helped all the broad indexes rally coming into Fed Decision Day. However the announcement, when it arrived on Wednesday afternoon, of the 0.75% increase in the Fed Funds rate and particularly the tone of Fed Chair Jerome Powell’s subsequent press conference, confirmed that the Fed continues to be wedded to an extremely hawkish stance and it was reiterated yet again (just in case there’s anyone left for whom this hasn’t sunk in yet) that, even if we have indeed already seen peak inflation (far from certain) and the Consumer Price Index (CPI) readings do start to trend lower from here, that is not even close to what the Fed needs to see in order to change its monetary policy. They will require multiple months of consistently falling inflation and their 2% target CPI rate appearing realistic before they will ease up on their current stance. Most of us heard nothing really new or surprising here, but some people need to be told things over and over before they finally absorb it - especially when what they are being told directly conflicts with what they yearn for (ie., an end to all this bearish, risk-off environment and a return to a nice, easy steadily rising stock market). Fed officials did out-hawk us all, however, with their frankly quite astoundingly front-loaded expectations of what comes next in their Summary of Economic Projections (the so-called Dot Plot). The median forecast within the Fed is for the Fed Funds rate to rise to 4.4% by the end of this year, then up to 4.6% early in 2023 with some members of the committee thinking quite a bit higher. As recently as June, those median numbers had been respectively 3.8% and 3.4%. If accurate, these latest projections would mean a total of still another one and a half percentage points of rate increases from here. That puts a fourth-straight 0.75% hike very much on the table for the next meeting in November (just six days before the US midterm elections) and then maybe even extending the streak to five in the one after that in December. The market’s expectation for the Terminal Rate (the Fed Funds rate at the time the Fed stops raising rates) is now about 4.62% and rising. After initially meandering higher following the announcement (perhaps based upon an element of relief that the hike was not a full percentage point), markets turned sour and spent the last part of Wednesday falling hard. The scenario of a no-recession outcome to what we are seeing is becoming less and less likely and the growling bears immediately turned their eyes hungrily on the 2022 S&P 500 lows of June 16th (SPX 3,666) as their next destination. By the end of yet another brutal Friday session to close the week, we were almost there (SPX 3,693). Investors will now turn their attention to the Q3 earnings season next month (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and it could be tough for stocks. A bleak warning last week from Ford Motor (F) about its upcoming earnings built on the previous week's dismal commentary from FedEx (FDX). The major indexes have still not yet priced in a material economic slowdown in the US and/or a really bad Q3 earnings season. If these both come to pass in a substantial way, the stock market could easily sink a lot further and still not be at a compelling value. Remember, however, that neither scenario is a given and it could be that both are avoided, but these are the factors that need to be top of mind for investors in the coming weeks. Keep an eye on them (or let me do it for you and just read/listen to my report each week). To end on a slightly more positive note, while the last few weeks have been undoubtedly painful, much of the baseless, naive hopes of a quick resolution to all of the economy’s issues and imminent falling interest rates have now been been tossed into the garbage and we may possibly be back to having a stock market that is more sensibly and accurately priced. OTHER NEWS: The newest emerging market? .. The United Kingdom is now essentially being treated by financial markets (and ex-Treasury Secretary Larry Summers) as an emerging market, in the same category as Vietnam, the Philippines, South Africa or Chile, which are viewed as not having the same degree of reliable, disciplined institutions setting economic policy as more developed economies such as those in North America, most of Western Europe/Scandinavia and Australasia. This comes after new UK prime minister Liz Truss and her new finance minister Kwasi Kwarteng introduced a mind-bending package of tax cuts, unfunded state aid and colossal increased borrowing. They claim it is intended to stimulate growth, but it clearly risks turbo-charging already out-of-control inflation and increasing the odds of a very nasty and prolonged recession. It’s a massive gamble of the part of the new government that is likely only two years out from a general election. Even the independent central bank, the Bank of England appeared shocked. Financial markets hated the plan, viewing it as a reckless, vote-seeking set of gimmicks that put the country in economic peril. Their punishment was swift and severe, the UK currency immediately plunged to its lowest level against the US Dollar since 1985 and the benchmark five-year interest rate exploded upwards for its largest one-day increase in its history. The problem for US investors is that the UK constitutes a relatively large component holding in exchange-traded funds and mutual funds focused on so-called developed international markets. These are very common among, for example, many 401k fund allocations. Global phenomenon .. It’s not just the US that is busy raising rates. Just last week alone, the central banks of the UK, Switzerland, Sweden, Norway, South Africa and Indonesia all did the same. Japan did not raise rates but did announce central bank intervention in foreign exchange markets to support the yen. The last time that happened, Will Smith was getting jiggy with it in 1998. Fewer jobs at the big guys .. Meta/Facebook is reportedly cutting staff in a push to reduce costs. the company is looking to cut costs by at least 10% while rival Google is requiring some existing employees to apply for new jobs. Walmart plans to hire fewer workers than last year as it prepares for the holiday season amid a slowing economy. Walmart plans to add 40,000 workers in seasonal and full-time roles compar… This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com