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Did Jerome Powell Give the Greenlight to Stock Investors?
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Federal Reserve chair Jerome Powell addressed the world economy on Wednesday and announced that he and his committee decided to raise the federal funds rate 0.25% to 4.5-4.75%. This was as expected, but the most important bits came during the press conference.
Depending on whether you are a bull or bear you may be interpreting what Jerome Powell said in different ways. The bulls are feeling reassured. Powell acknowledged that “the disinflation process has started,” and how incredibly relieving it is to see that process begin. The bears, however, were focused on his saying that it would be “very premature to declare victory,” over inflation. And that some sectors of the service economy have yet to see any disinflation at all.
Bull Case
The stock market has corrected significantly since the beginning of the rising rates policy and has now discounted the worst. As unlikely as it seemed, it appears Jerome Powell and the Fed have pulled off the goldilocks ‘Soft Landing,’ where they have lowered inflation in such a way that the economy didn’t need to slow significantly, and employment remained robust.
One of the most important indicators for the Fed is the ECI (Employment Cost Index), which measures wages. One of the biggest risks for inflation is a wage-price spiral, but the ECI is showing consistent decreases.
Looking back at other bear markets we see that earnings always bottom out after the market, because markets are forward-looking. Furthermore, financial conditions have loosened quite significantly already. According to the Financial Conditions Index, economic policy is as loose as it has been in other recent expansionary periods.
Image Source: Goldman Sachs
Bear Case
While Jerome Powell has been successful in initiating disinflation, there is no guarantee it will continue to improve. Worse yet, because expectations have become so hopeful about disinflation, even a small miss to the upside on inflation can really shake the markets. What if inflation is stickier than expected?
Earnings seem to be coming in around expectations, but that is because analyst expectations were extremely low. What if there is a secondary push lower in the economy just as everyone is getting bullish again?
Furthermore, with the now easing conditions of financial markets, and such robust employment, how do we know this won’t reignite inflation?
Statistics Favor the Long-Term
These issues are never black and white, and the case can easily be made for bears or bulls. Something the data tells us conclusively is that over the long term, stocks are an extremely good investment. Whether you buy in a bull market or a bear market, the real edge is focusing on owning quality businesses, with improving earnings over the long run.
Stocks to Watch
Some of the best stocks in the world have been completely battered by the rising rates environment. But that dynamic is slowly switching over. And this may be a great opportunity for investors to start buying stocks still in correction territory. With the Fed easing off the breaks, it’s possible stocks will see a continued rally.
Although they will be reporting earnings on Thursday, February 2 after the close, Amazon ((AMZN - Free Report) ), Apple ((AAPL - Free Report) ) and Alphabet ((GOOGL - Free Report) ) are hard to ignore at this point. They are extremely dominant, and innovative businesses that have been beaten down significantly.
Image Source: Zacks Investment Research
Additionally, Meta Platforms ((META - Free Report) ) announced Q4 earnings Wednesday after the close, and investors were very happy with the numbers. Meta is already up 25% on Thursday in response to the earnings call. Meta saw a 4% increase in Daily Active Users, a 23% boost in ad impressions, and a -22% decrease in the cost of advertisements. Meta beat revenue estimates and announced a $40 billion stock buyback program. The stock is up over 100% off its November 2022 lows.
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Did Jerome Powell Give the Greenlight to Stock Investors?
Federal Reserve chair Jerome Powell addressed the world economy on Wednesday and announced that he and his committee decided to raise the federal funds rate 0.25% to 4.5-4.75%. This was as expected, but the most important bits came during the press conference.
Depending on whether you are a bull or bear you may be interpreting what Jerome Powell said in different ways. The bulls are feeling reassured. Powell acknowledged that “the disinflation process has started,” and how incredibly relieving it is to see that process begin. The bears, however, were focused on his saying that it would be “very premature to declare victory,” over inflation. And that some sectors of the service economy have yet to see any disinflation at all.
Bull Case
The stock market has corrected significantly since the beginning of the rising rates policy and has now discounted the worst. As unlikely as it seemed, it appears Jerome Powell and the Fed have pulled off the goldilocks ‘Soft Landing,’ where they have lowered inflation in such a way that the economy didn’t need to slow significantly, and employment remained robust.
One of the most important indicators for the Fed is the ECI (Employment Cost Index), which measures wages. One of the biggest risks for inflation is a wage-price spiral, but the ECI is showing consistent decreases.
Looking back at other bear markets we see that earnings always bottom out after the market, because markets are forward-looking. Furthermore, financial conditions have loosened quite significantly already. According to the Financial Conditions Index, economic policy is as loose as it has been in other recent expansionary periods.
Image Source: Goldman Sachs
Bear Case
While Jerome Powell has been successful in initiating disinflation, there is no guarantee it will continue to improve. Worse yet, because expectations have become so hopeful about disinflation, even a small miss to the upside on inflation can really shake the markets. What if inflation is stickier than expected?
Earnings seem to be coming in around expectations, but that is because analyst expectations were extremely low. What if there is a secondary push lower in the economy just as everyone is getting bullish again?
Furthermore, with the now easing conditions of financial markets, and such robust employment, how do we know this won’t reignite inflation?
Statistics Favor the Long-Term
These issues are never black and white, and the case can easily be made for bears or bulls. Something the data tells us conclusively is that over the long term, stocks are an extremely good investment. Whether you buy in a bull market or a bear market, the real edge is focusing on owning quality businesses, with improving earnings over the long run.
Stocks to Watch
Some of the best stocks in the world have been completely battered by the rising rates environment. But that dynamic is slowly switching over. And this may be a great opportunity for investors to start buying stocks still in correction territory. With the Fed easing off the breaks, it’s possible stocks will see a continued rally.
Although they will be reporting earnings on Thursday, February 2 after the close, Amazon ((AMZN - Free Report) ), Apple ((AAPL - Free Report) ) and Alphabet ((GOOGL - Free Report) ) are hard to ignore at this point. They are extremely dominant, and innovative businesses that have been beaten down significantly.
Image Source: Zacks Investment Research
Additionally, Meta Platforms ((META - Free Report) ) announced Q4 earnings Wednesday after the close, and investors were very happy with the numbers. Meta is already up 25% on Thursday in response to the earnings call. Meta saw a 4% increase in Daily Active Users, a 23% boost in ad impressions, and a -22% decrease in the cost of advertisements. Meta beat revenue estimates and announced a $40 billion stock buyback program. The stock is up over 100% off its November 2022 lows.