Will Santa Bring a Fed Pivot?

Did Federal Reserve Chair Jerome Powell deliver an early Christmas gift for investors?

In his recent speech, Powell commented that “it makes sense to moderate the pace of our rate increases… as soon as the December meeting.”

After the Fed’s historic pace of interest rate hikes and the bear market it brought, anxious investors were happy to hear these words.

That’s because it sets up a highly anticipated pivot toward easier monetary policy.

Pivot chatter has picked up following signs that inflation is slowing its rapid ascent, which is a driving force behind the S&P 500’s 11.5% rally since mid-October.

The market gained over 3% in just one day following Powell’s message.

But investor optimism might be misplaced.

So, before you celebrate, first consider what a pivot actually means for the economy and stocks…

Pivots Have Been Bad for Stocks

The term “pivot” describes the Fed’s transition to easier monetary policy. That’s marked by a slowing pace of rate hikes that gives way to outright cuts.

And in a year when rate increases are bludgeoning stocks, you’d think a pivot seems like a welcome change.

But pivots don’t always end well…

It’s actually been quite the opposite when you look at the last two major bear markets with the 2000 “dot-com” bust and 2008/2009 financial crisis.

The chart below shows the overnight federal funds rate (orange line) and the S&P 500 (blue line). The Fed pivot took place before stocks took their biggest plunge (grey dotted line).

Take a look…

That’s because a pivot signals tough times ahead for the economy, and thus corporate profits.

This may seem counterintuitive… But to understand the negative foreshadowing, let’s see what drives a pivot.

Pivots Signal a Damaged Economy

The Fed is tasked with two jobs: keep prices stable and people employed.

Achieving both requires a balancing act with interest rates to keep the economy at the right speed.

But unfortunately, the Fed tends to push rates too far in either direction. Those extreme moves create boom-and-bust cycles for the economy… Like slashing overnight rates to zero in the wake of the pandemic.

Now we’ve seen four consecutive 0.75% hikes – a truly unprecedented rate.

And pivoting is historically a bad signal because it follows the stark realization by Fed officials that they’ve pushed things too far and took the economy to the brink.

But by then, it’s too late.

Take another look at the federal funds rates in the chart below, this time with recessions shown in the grey shaded areas. Pivots happened before the last three recessions hit…

That means pivoting is a sign the Fed has gone too far in their battle against inflation – and is doing serious damage to the economy…

By the time the Fed realizes it’s making a mistake, it’s already too late for the economy and corporate earnings. And that’s why you see further pressure on stock prices.

So don’t take a Fed pivot as an all-clear signal. Rather, it’s a sign this bear market has room to run.

My colleague Jeff Clark has also shared his analysis on why he thinks this bear market isn’t over.

But that hasn’t stopped him from taking advantage of the opportunities bear markets offer

Just last week, Jeff took advantage of the jump in gold and silver prices to close out five trades for gains as high as 167%… proving that even though the bear isn’t going into hibernation anytime soon, there’s still ways to play the market.

If you’d like to receive his next trade alert, you can join his flagship trading advisory right here.

Best regards,

Clint Brewer
Analyst, Market Minute

Reader Mailbag

In today’s mailbag, a Jeff Clark Trader member shares his experience…

I’ve made my money on GDX but got in late. I’ve made money on most of the rest too, so far. If I had more to invest, then I would have made a bundle. Excellent service! Thanks, Jeff. Keep the good trades coming.

– Harry H.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].