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Equity markets continue to struggle as my work has been suggesting. The big events for last week were the FOMC meeting and the large quarterly option expiration that has added to the challenging increase in volatility. Last week, the S&P 500 traded between 3840—3636, which is just above my longstanding next downside target range of 3600-3500 and closed near 3700 as there is still a hope by some that a significant low has been reached. Besides being oversold on some metrics and a handful of sentiment indicators flashing depressed levels, my work does not yet provide any compelling evidence that it’s time for investors to pivot to a full bullish view.
The Fed’s June hike was 75 bps marking the largest hike since 1994 and continues to support my ongoing view that the FOMC is focused and serious to succeed in its inflation fighting mission. Going into last week’s meeting, there was a lot of noise and debate whether the committee would go 50 or 75bps following the recent hot CPI data release and an article in the Wall Street Journal suggesting that 75bps was likely. Would Chair Powell stick with his stated forward guidance, which he has commented many times is the Fed’s most effective policy tool, or was the news story a clear leak to give the market a heads up? Practically speaking, the difference between the two outcomes on inflation in the immediate term is small, but the impact on the Chair’s credibility could be large. In my view, Powell has created a perception problem of his own doing and it remains to be seen what the longer lasting consequences may be. Following the meeting, nearly all Fed speakers continue to sound closely aligned that their fight to restore price stability was “unconditional.” Even the historically dovish Fed Governor Kashkari stated that he could support another 75bps move in July. All I can comment here is — WOW!


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Thomas J. Lee
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