The intellectual tug-of-war between bulls and bears continues, with market performance determining the winner. The bulls have clearly held the lead since the beginning of the year, but the bear camp had a great opportunity yesterday to end the party that began last October with Chairman Powell's appearance at an event in Washington, D.C. Expectations were that his tone would shift from dovish to aggressive following the massive rally following his press conference last week, as well as a much stronger-than-expected jobs report. That didn't happen. Instead, he reiterated that he expects a "significant decline" in inflation in 2023, which led to a sharp rise in the major market indexes. He added that further interest rate hikes would be appropriate, which temporarily reversed the rally, but followed up with the statement that the Fed will remain dependent on month-to-month data. The rally resumed, and stocks closed at the day's highs.
Finviz
I'm sure the bears expected more follow-through on the post-jobs report selloff, but I think they continue to operate under several false assumptions. Powell isn't trying to instigate a market decline or a recession. In fact, quite the opposite. He's aiming for a soft landing for the economy, and the jobs report showed he's on the right track. He said last week's strength in the jobs number was a good thing because "inflation has started to decline, not at the expense of a strong labor market." Powell's language is as balanced as he expects the economic data to be, in terms of neither too hot nor too cold. He's not a hawk nor a bear, but a bull posing as a hawk or a bear at times to continue managing inflation expectations and the Fed's credibility. I think the biggest mistake the bear camp continues to make is taking literally what Powell or any other Fed official says, rather than focusing on the incoming data that they will use to make their decisions. As Powell said, last week's jobs number was good news and came with another decline in wage growth.
Bloomberg
Powell acknowledged that reducing inflation won't happen overnight, indicating that "we think we'll have to keep policy at a tight level for a period of time." How long is "a period of time"? I think it's intentionally anonymous. This leaves the door open for rate cuts later this year, but it could also mean we don't get any. This is consistent with being data-dependent, as he doesn't know for sure how quickly inflation will fall, but he did give us clues about his thinking by saying he sees a "significant decline" in the core personal consumption expenditure (PCE) price index, which closed last year at 4.41TP3Q. While he said goods inflation is falling rapidly, his concern is that services inflation hasn't yet significantly reduced. But since the most important component of inflation for service sector companies is wages, last week's employment report likely reassures him.
CommerceEconomy
Given the growth of low-wage jobs as higher-paying white-collar positions are eliminated, I expect growth in average hourly wages to continue to decline to a range of 3 to 41 TP3T during the second half of this year, if not sooner. I expect Powell to do the same, which gives him confidence that services inflation will follow what we've already seen in goods inflation. Powell won't lay all his cards on the table, as he doesn't want financial conditions to improve further until he's no longer confident in their outlook. Furthermore, he can send lackeys like Neil Kashkari to do the dirty work when he wants to dampen enthusiasm for risk assets with hawkish rhetoric.
As for the ongoing tug-of-war, the bulls have another strong tailwind that the bears likely haven't recognized. Perhaps the biggest bear of all, Jeremy Grantham, noted this tailwind in his latest article on GMOs. The presidential cycle is the 7-month period from October of the second year of a presidential term to April of the third. The S&P 500's returns during this 7-month period are equal to those of the remaining 41 months over a 4-year period in data going back to 1932, which is why the annualized numbers are much higher for the 7-month period, as shown below.
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We're in the middle of the presidential cycle now, and when you combine that with all the bullish developments I've discussed over the past six weeks, including the Santa Claus rally, the first five trading days of this year, the January effect, and activating three different breadth indicators, you have a hell of a tailwind. I'm not suggesting the stock is going to the moon, but being a bear in the short and medium term seems like an uphill battle.
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