Get Ready for Tomorrow’s “Powell Rally”

Federal Reserve Chairman Jerome Powell

Stocks got “monkeyhammered” lower this morning after mega-retailer Walmart (NYSE: WMT) issued a profit warning last night. The company said that higher-priced discretionary items – televisions, electronics, etc. – vastly underperformed in Q2 due to rising inflation. This suggests that shareholders should expect a major miss when WMT reports earnings on 8/16.

WMT shares plunged over 8% in response, dragging the rest of the market down in the process.

The profit warning reinforced every bearish pressure weighing on markets.

WMT confirmed that inflation is too high, and the American consumer is low on cash. The warning also provides further evidence that retailers have too much inventory, and, more imminently damaging for WMT shareholders, that said retailers will be forced to liquidate their inventories during a recession.

Sounds bad, doesn’t it? The silver lining for consumers is that deflation will result among items that aren’t selling. This should help cool future inflation readings, and many retailers have already begun marking down surplus items. Bargain shoppers rejoice.

But prices for goods that people actually need – groceries, gas – should remain persistently high. That’s not good. And with a rate hike looming, it will do little to ease Fed Chairman Jerome Powell’s tightening plans.

“The most important thing from the Walmart announcement is how inflation is changing what people buy,” said Upholdings portfolio manager Robert Cantwell.

“Food now makes up a bigger share of individuals’ budgets, but overall spending still generally remains intact.”

To the Fed, that translates to “spending strong enough to handle big hikes, inflation too high to avoid big hikes.”

That’s probably going to change, however, after retailers report earnings and show just how much revenues have fallen. The upcoming Q2 GDP report this Thursday is likely to indicate this as well.

Bulls were betting on weak economic data last week, which led to a rally that finally broke the major indexes out past their recent highs. “Bad news is good news” was the narrative once more with a rate hike approaching.

And that’s likely to be the case this week, too. The Fed’s expected to raise rates by 75 basis points this Wednesday. Powell himself will probably talk about how the economy has softened and why the Fed needs to be careful about raising rates too much.

The last few times Powell delivered his post-FOMC remarks, stocks rallied strongly to close out each trading session. Analysts predict a similar outcome this time around.

But some strategists still see a bearish continuation for stocks following Wednesday’s hike.

“We expect the Fed will signal that they are still following the data and leave the door open for at least one more 75 bps increase – if not multiple 75 bps rate increases – and market interest rate expectations will become less sanguine about the Fed pausing rate hikes any time soon,” explained Chris Zaccarelli, Independent Advisor Alliance’s chief investment officer.

We’ll see what happens tomorrow, but my money’s still on a Powell-driven afternoon rally. Whether that snowballs into a larger uptrend, on the other hand, is less certain. It all depends on how Powell chooses his words and the arguably just as important Q2 GDP report, which comes out the next morning.


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