Markets have been on the ropes all year, which made Wednesday’s Fed meeting an important one.

There were rumors that the Fed would raise rates by 50-basis points more than market expectations – or that it would eventually do it later in the year.

But 15 minutes into the press conference, Fed Chairman Jay Powell spoke these magic words:

“A 75-basis point increase is not something the committee is actively considering.”

And like magic, the market rallied 3.5% in about 90 minutes… squeezing the short sellers and the bad sentiment out of the market.

It’s amazing how a one-day rally can change everyone’s mood…

But the real market reaction after a Fed meeting can’t be gauged over the course of two hours.

For example, take the meeting on December 15…

The market was sensing the Fed would eventually pivot after months of calling inflation transitory and making official statements like, “we’re not even thinking about thinking about raising rates.”

As expected, Jay Powell did pivot.

And still, the market rallied. Everyone thought the coast was clear.

This was the meeting that set the pieces in place for most of this year’s losses. The market has now completely transitioned into an all-out freefall.

After yesterday’s bullish reaction, many think the coast is clear once again.

Jeff Clark and I saw this relief rally coming. On Monday, Jeff pointed out oversold conditions in his essay. And on Tuesday, I pointed to valuations reaching a place where buyers could start to find value.  

But this rally doesn’t mean we’re going to new all-time highs soon.

There’s a difference between anticipating a short-term squeeze and going all-in for a sustained rally.

Jeff explained it best in yesterday’s morning update to our Delta Direct subscribers…

A rally like yesterday’s usually only happens in bear markets. It’s caused by a combination of oversold technical indicators and extremely bearish sentiment. It’s a “rubber band” snap-back rally. So, we’re probably not going to get new highs in the broad stock market.

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We’re still in a bear market and getting out of it will require heavy lifting on a global scale.

The last time we saw this kind of market environment – where inflation is out of control – was in the 1970s.

From 1970 to 1977, the S&P 500 rose just 3%.

During that time, the market had wild up and down swings… an absolute meat grinder.  

If the market goes back to the 70s, the up and down action we’re seeing today is only the beginning.

The Fed is in a limited position and can’t correct conditions overnight.

That’s because inflation has two components to it – supply and demand. The Fed can only control the demand. And the supply constraints in almost every corner of the economy are under immense pressure.

Even though the S&P 500 came down from a 23 price-to-earnings (P/E) ratio at the market top in January – to a 17.50 P/E – we won’t magically go back to January levels.

There will be opportunities in high-quality stocks for long-term investors to begin accumulating. But it’s not the time to buy hand over fist.

As I said on April 29

Not everything will rise and fall together… Not everything will go strictly up either… We will probably see a continued meat-grinder on the index level – up 5% and down 5% on a regular basis.… Investors should keep this mindset in place before pulling the trigger on future buys.

It’ll take time for the market to adjust to this new environment of slow growth and rising rates.

Investors must be patient before going all in and bet that everything will rise – like it did last year.


Eric Shamilov
Analyst, Market Minute

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