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To The ‘Bad News is Good News’ Crowd, Powell Begs to Differ

CAMS Weekly View from the Corner – Week ending 11/4/2022

November 7, 2022

The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done. Fed Chair Powell, Press Conference November 2, 2022

 In our previous edition we shared what has become nearly a slogan within various circles of market participants and observers over the previous twenty-plus years which is the well recognized “bad news is good news” mantra. In that edition we offered, perhaps, this will prove to be a worn out slogan which will become apparent to the various groups who profess it as near-term time unfolds.  The driver of this potential awakening is the fact that, unlike the previous couple of decades we now are experiencing multi-decade, societal changing type of price behavior across the economic spectrum that has displayed strong trend characteristics.  It is sticky and is not a mere blip being it has been with us for coming up on two years.  We could say it is seemingly trying to become entrenched.  Entrenched price inflation is bad news to a society with no good news wrapped around it relative to the overall citizenry. Per the Fed Chair’s prepared comments as well as in the Q&A session after their interest rate policy meeting (known as the Federal Open Market Committee meeting) last Wednesday it was made clear Powell and friends view bad news (price inflation) as bad news.  They gave no acknowledgement that price inflation (bad news) with a deteriorating economy (“good news”) will then present them an opportunity to worry less about price inflation and more about the deteriorating economy and hence “pivot” (as it is referenced in the bad news is good news crowd) from a price inflation fighting focus to an interest rate reduction focus in light of a weakening economy. Rather, the focus was on the bad news price inflation backdrop centered on reducing that to their long held range.  Our excerpt header quote above from Wednesday’s press conference speaks to this.  The referenced “job” within the quote is to unequivocally reduce the price inflation problem. The Fed’s Long Held 2% Price Inflation Target For some brief Fed history they have had an openly stated 2% price inflation policy objective over recent decades.  This has been their mantra stated in any release or price inflation discussion over many years. Built into the, bad news is good news view, is an inherent belief that they may have abandoned the long-held 2% target policy and would be willing to ease up on that to say a 3% or an even higher level.  To this view we offer that in Chairman Powell’s prepared remarks, when beginning last Wednesday’s press conference, he stated seven times (we counted) within three short pages of text which took five short minutes to articulate that the Fed is committed to their historical 2% price inflation target current day. This begs the contemplation:  If you find yourself in a short few minute discussion with someone and they state seven times the same theme/thought is it fair to say, upon walking away, that you unequivocally know what is really important to them relative to the discussion? The Fed Chair is the nation’s chief banker and when he speaks formally in a press conference it is meant as a discussion to the entire citizenry.  It is not meant to a select few but rather the citizenry at large.  Parlaying this to our contemplative scenario, clearly it is fair to conclude, upon walking away from the few minute discussion the Fed chairman had with the citizenry, he and his committee is fully committed and serious about their 2% inflation target policy.  With this, and to the bad news is good news crowd, we are a long way away from 2% price inflation.

The above chart offers a visual of what we have shared thus far in this edition.  The Personal Consumption Expenditures: Chain-type Price Index (PCE) is the Fed’s long favored price inflation measure.  It currently registers in the 6% range and has all year long – reflecting little progress thus far with the price inflation issue. As an aside and yet confirming the above price inflation story, the well recognized CPI currently registers in the 8% range and has all year long reflecting little progress as well. We focus on the Fed’s preferred measure above and take the chart back to the late 1950’s for a broad perspective.  Our top red arrow line highlights that our current inflation experience remains at multi-decade high levels last seen in the early 1980’s.  Our lower red horizontal line marks the 2% inflation level throughout the entirety of the decades shared.  Our red down arrow highlights the tremendous differential between our current inflation read for the Fed’s preferred PCE price index and the Fed’s long-held 2% inflation target.  Simply, using Powell’s language from our header quote, the “job” is far from done. Stock Market – Got Volatility? All of the above spells out a near perfect recipe for on-going if not increased pricing volatility in the stock market.  The type of volatility, perhaps, that if you look away for a few days you think you have a new market environment on your hands.  Think up a lot/down a lot type of price action. Even with our above focus taken directly from Chairman Powell’s most recent press conference we fully expect narratives to remain, to build and to include, you guessed it, bad news is good news! With this, with each passing week X narrative may dominate collective market participant’s mindset only to be replaced with a counter mindset X days or weeks later.  All told, through it all pricing can be expected to be volatile.  Interestingly, this is focusing only on interest rate policy.  Add in a host of additional narratives such as elections views, earnings results for stock market companies and geo-political twists and turns to name only a few and pricing uncertainty can most likely be expected to continue. All through the confusion, while reducing to simplicity, what we do know is the stock market remains in a confirmed downtrend – that is certain.  Sometimes, when the analytics board is filled with nothing but uncertainty it is wise to ask one question:  What if anything do we know with certainty?  To answer, the stock market is in a confirmed downtrend which is important information to keep in mind.  Outside of that we’ll let time add to her story. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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