Here Comes the “Powell Rally”

Fed Chairman Jerome Powell

Stocks jumped higher today in a nervous morning session. The Dow, S&P, and Nasdaq Composite all gained significantly, reversing yesterday’s losses completely in the process. Fed Chairman Jerome Powell is set to announce a rate hike this afternoon at 2 pm EST, potentially launching another bear market rally in the process. Mixed earnings results continue to roll in as well, casting doubts on the state of the US economy.

“Earnings growth estimates continue to slip, even for the technology sector, which typically holds up relatively well during economic slowdowns,” said Sam Stovall, chief investment strategist at CFRA Research.

“Pressure from a pullback in consumer spending likely contributed to EPS/sales shortfalls, as all measures of consumer confidence have deteriorated sharply from peaks around mid-2021.”

The market is anticipating a 75 basis point rate increase (but dovish commentary) from Powell today. The last few rate hikes have all played out exactly the same: stocks slump when the rate increase is officially announced before rallying strongly into the close on Powell’s remarks.

That’s what transpired following the last FOMC meeting on June 15th.

Not pictured is the 4% correction that occurred over the next two trading sessions. The moral of the story here is that Powell press conferences, while often bullish, don’t typically spark bullish trend reversals. Nor do they spur on bearish reversals.

Powell’s remarks only provide temporary “blips” in the market that are eventually consumed by the prevailing short-term trend. Today’s press conference should be no different.

Even if Powell delivers a surprisingly hawkish presser and stocks close lower, the short-term uptrend of the last handful of trading sessions will probably continue. Keep in mind that the market has already priced in a 75 basis point increase.

That means, outside of a 100 basis point hike, stocks shouldn’t really react all that much to the hike itself.

What’s more important is how quickly the Fed plans on raising rates this year, which investors hope to glean from Powell’s post-hike comments.

“With so many moving parts to consider, we expect markets to remain volatile after the FOMC meeting,” wrote UBS Global Wealth Management’s Mark Haefele.

“With the markets anticipating a 3.3% fed funds rate by year-end, this means that after this week’s meeting, there may be around 100bps of rate hikes by end-December. But the pace of hikes remains uncertain.”

Wells Fargo chief equity strategist Christopher Harvey similarly believes that investors won’t get clarity on the Fed’s longer-term rate plans this afternoon.

“The market can begin to firm once it believes the Fed is going to toggle down expectations,” Harvey said.

“You’re not going to get that on Wednesday, but I do think you get a pretty good probability of that occurring in September.”

What could fuel further rate hike speculation, though, is tomorrow’s Q2 GDP advance estimate. The Bureau of Economic Analysis (BEA) releases its second quarter GDP data before the market opens tomorrow morning and analysts expect it to reveal negative growth, thus confirming that a recession has arrived following Q1’s GDP contraction.

The weaker the US economy is, the higher the chances that the Fed backs off its rate hikes. That makes a recession ironically the best outcome for bulls. And, if the BEA says a recession is here, bulls may have enough fodder to sustain the current recovery for at least another week or two prior to a longer-term bear market continuation as stocks succumb to their longer-term cycle lower.


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