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"One Of The Craziest Days Of My Career"
Volatility has been high this whole year. But sky-high these past few months.
The daily swings in the market are enough to make even the most professionally experienced investors seasick.
Rick Rieder, Chief Investment Officer for global fixed income at BlackRock Inc., said October 13th was one of the craziest days of his career.
From MarketWatch:
“The S&P 500 booked the biggest intraday comeback since December 2008 on a percentage-point basis, while the Dow Jones Industrial Average saw its biggest intraday swing on a percentage-point basis since April 2020.
Volatility in bond markets was also intense Thursday, as the yield on the 2-year Treasury note rose 16.2 basis points to 4.449% from 4.287% at 3 p.m. Eastern on Wednesday, marking its highest such level since Aug. 9, 2007.”
These swings have become normal in a world where the Fed is hellbent on tackling inflation. They won’t stop until they destroy more of your wealth. And put millions more people out of work.
The market has been wrong at every turn. They keep thinking the Fed is going to pivot — whether that be to pause its rate-hiking warpath… or to cut interest rates. But they won’t.
The S&P 500 and Nasdaq rose 5-6%+ each last Thursday when the most recent consumer price index (CPI) came in a little lighter than expected — but still at 7.7%. Core CPI (excluding food and energy) came in at 6.3%.
Investors saw this as a positive sign as it means the Fed might soon pivot.
It wasn’t more than two weeks ago during Fed Chair Jerome Powell’s press conference where he said it’s “very premature to think about pausing.” And (emphasis added):
“The incoming data since our last meeting suggest the terminal rate of Fed Funds will be higher than previously expected (4.63%), and we will stay the course until the job is done…
Prudent risk management suggests the risks of doing too little are much higher than doing too much. If we were to over-tighten, we could use our tools later on to support the economy. Instead, if we did too little we would risk inflation getting entrenched and that’s a much greater risk for our mandate.”
The market didn’t seem to care.
Minneapolis Fed Chair Neel Kashkari told the public months ago he’s happy to see the markets tank. Because it shows the markets the Fed is serious.
So the markets rallying 5-6%+ in a day is a negative signal. One that tells the Fed they have more hiking to do.
Every Fed member has repeatedly said they need inflation to come down to 2%.
CPI is at 7.7%. Core CPI is at 6.3%. The Fed funds rate is just below 4%. So we’re still a long ways away.
Don’t take my word for it. Take Fed Governor Christopher Waller. Here’s what he said about the markets’ reaction to October’s CPI print last week (emphasis added):
“It was just one data point…The market seems to have gotten way out in front over this one..We've still got a ways to go.
‘This is exactly the situation we had gotten into in July.’ [Back then, there was] a loosening of financial conditions that we were trying not to do.’”
The markets continues to think the Fed is bluffing. But the markets have been wrong all year.
Here’s what we said August 23rd in our missive Now What?:
“So the market — which sold off based on the Fed’s hawkish rhetoric over the past 6 months — is now discounting the Fed’s rhetoric for continued hawkishness?
The market was wrong this year. Especially about the rise of interest rate hikes.
It didn’t even think the Fed could raise rates to begin with…
Will the market make another mistake in 2023?
We’re no market prognosticators. Nor are we macroeconomists. So you won’t get a market call out of us.
But to think the Fed won’t continue down its warpath on raising rates, to get inflation back down to 2%, seems anything but a foregone conclusion.
This disconnect between the markets and the Fed’s rhetoric leads us to believe volatility is here to stay.”
Nothing has changed since…
The Fed’s actions are louder than their words. Which means you need to believe them until proven otherwise.
Until the market comes to terms that the Fed is serious — which it has yet to do — expect volatility to remain high.
Our advice continues to remain the same.
The knife is still falling. Expect more volatility in the coming months. Have enough cash to sleep well at night. And make sure you know who you are. And what you own. To prevent getting shaken out of the markets of your highest conviction ideas.
Good investing,
Lance