Tuesday, August 22, 2023

Four Reasons to Ignore Jerome Powell’s Tough Talk This Week

Four Reasons to Ignore Jerome Powell's Tough Talk This Week

When Federal Reserve Chairman Jerome Powell speaks this week at the 2023 Economic Policy Symposium, the stock market probably won't like his message.

And we may not like the near-term impact as investors, either.

After all, at this same event roughly a year ago, Powell's hawkishness about inflation and additional rate hikes gave stocks a bit of a beating. Indeed, last Aug. 26, the Nasdaq, S&P 500, and Dow Jones Industrial Average each stumbled by 3% or more.

This time around, we're looking for some version of the more recent "the Fed still has work to do" rhetoric — which could mean anything from the central bank standing pat to sending rates higher.

No matter the message — and no matter the near-term fallout — Quantum Edge Pro Editor Jason Bodner is making one very clear prediction.

The Fed is done raising rates.

"I think it would be risky to raise rates again," he told me during a visit to TradeSmith's corporate headquarters this week. "But, Keith, even if that happens, it will have to be the last one."

In fact, Jason believes we're closer to the start of rate cuts than we are to continued increases.

That's right.

The near-record cash hoard that continues to sit on the stock market sidelines tells Jason that far too many folks are waiting for that "last" rate increase — an increase that will likely never come.

That means they'll miss out on the start of the "Big Lift" he's predicting will begin in October. It also means their rush to play "catch-up" will fuel that stock-price rally once it gets rolling.

Before you dismiss his "end of the rate cuts" prediction — a prediction that's contrarian to what so many (loud) prognosticators are saying — let me share an important point.

Jason backs his belief with four very good reasons why the Fed will — and could even be forced to — stop boosting interest rates.

No Hike Reason No. 1: Inflation Keeps Cooling

According to the latest Consumer Price Index (CPI), inflation clocked in at 3.2%, a smidge better than forecasts of 3.3%.

But that's still a night-and-day difference from last year at this time when inflation was a pain-inducing 8.3%.

And when you dig into the data, the story gets even better: Jason says costs for shelter and dining out — which have stayed stubbornly hot — are finally starting to cool.

No Hike Reason No. 2: The "Spread" Is Too High

The Federal funds rate — the central-bank-set target rate commercial banks charge one another for overnight loans — was 5.12% in July.

That's a full 1.92 percentage points above inflation, which is something that hardly ever happens.

In fact, Jason says this is the largest spread between inflation and interest rates since 2009:

And Jason says a spread that big means one thing: Interest rates are bound to "normalize" — or, in this case, start to get cut.

No Hike Reason No. 3: Bumpy Landings Can Be Avoided

Anytime the Fed turns hawkish, you start hearing about "hard landings" and "soft landings."

A "hard landing" is Wall Street speak for a recession. Think of a pilot misjudging the landing and smacking the runway — hard. With a hard landing, Fed policymakers, in essence, "misjudge" the size and number of rate increases needed to dial down inflation, or an overheated economy — creating a gut-wrenching touchdown that can lead to a drop in corporate profits while also creating job losses across industries and across the general economy.

With a hard landing, central bankers would tame inflation — their key goal — at the cost of economic pain.

A "soft landing," on the other hand, is nothing short of a Fed masterstroke: A campaign of "just right" interest-rate increases that tame inflation and slows growth — at worst leading to a flat economy — but avoids a recession. But given the corporate-earnings growth we're expecting — profits likely bottomed in the second quarter — Jason believes we may not have a "landing" at all because of how everything is humming along.

Chalk it up to overly bearish projections, or chess-master executives perfectly managing Wall Street expectations, and you've got a recipe for several quarters' worth of "upside surprises" from Corporate America.

We're already seeing that play out during this latest earnings cycle. As of Aug. 14, 80% of companies reported earnings above analysts' expectations, which is the highest since the third quarter of 2021.

This growth — paired with cooling inflation that's closing in on the ideal 2% goal — has put the Fed in a potentially winning position… as in one where it's not forced to keep boosting interest rates.

In short, there's no pressing need to risk tipping the American economy into a recession.

No Hike Reason No. 4: The Debt Hangover

U.S. government debt exceeds $30 trillion.

And as is true with our credit cards, school loans, and car payments — piles of debt are accompanied by hefty interest payments.

With every percentage point increase in interest rates by the Fed, Washington's interest tab increases by $300 billion, Jason says.

And don't think for a minute that Fed policymakers aren't factoring that costly variable into their rate-hike debates.

Knowing all this gives you an advantage, because as everyone else focuses on the rate hikes that may never happen… you'll be ready for October.

Jason says this will be the start of the "Big Lift."

The "Big Lift" is where the record amounts of cash sitting idly in money-market accounts — $5.7 trillion to be exact — could start to flow back into buying stocks as everyone starts waking up to the fact that the Fed is most likely done hiking rates.

In his Quantum Edge services, he's taken advantage of the choppy summer market we're in now.

Volatility can be scary. But one thing is certain: It produces some of the best buying opportunities possible.

And his goal is to be locked and loaded in the best companies.

Because the closer we get to the end of the year, the more Jason is convinced that stock prices will shoot up and continue rising into 2024.

Enjoy your Tuesday,

Keith Kaplan
CEO, TradeSmith

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Tuesday, August 22, 2023