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Due to the importance of yesterday’s FOMC, we are sending out the First Word today, instead of Friday. There will be a resend of today’s note with updated COVID data tomorrow morning.
50bp did not end the world…
Equity markets rallied strongly following May FOMC. We will discuss our key takeaways (about market reaction) in the next section. But keep in mind, stocks have rallied post-FOMC in 5 of the 6 most recent FOMC decisions. So, we expect some positive follow-through over the next 10 days or so.
- as extensively previewed Wed am, multiple datasets show investors were too hawkish and pessimistic into FOMC meeting
- thus, we could perhaps see positive follow-through on the “stronger side”
Key takeaways from FOMC meeting
This FOMC decision and press conference is, not surprisingly, one of the most important meetings in the past few years. And markets were clearly soothed by Powell. Here are our main takeaways:
- Fed summoned its inner “Spiderman” and reminded markets that monetary policy is a blunt instrument
- 75bp not “actively discussed” amidst signs of peaking inflation
- Tightening financial conditions doesn’t mean stock market needs to break
- Bond market has already done a lot of work for Fed by tightening financial conditions
…with great power comes great responsibility, especially with a blunt instrument
One of the most important statements by Powell (a reminder), in my view, is that monetary policy is a blunt instrument. And given the Fed is the most powerful entity in the world, it is important for the Fed to act carefully. This was a message that did give markets some comfort.
![YARN | With great power comes great responsibility. | Spider-Man (2002) | Video gifs by quotes | bfd5db65 | 紗](https://y.yarn.co/bfd5db65-74d7-47d2-aafd-f278f5ab4aae_text.gif)
As the transcript below highlights (two sections), he notes that monetary policy cannot be surgical. But later, Powell makes clear that are looking for signs policy is working.
- but the Fed does not want to allow inflation to run away
- this is a key balance, highlighting their vigilance
And of course, while markets view the Fed as “behind,” investors have to remember blunt instruments can break things. And the Fed doesn’t want to break the economy nor stocks.
![Sledgehammer GIFs - Get the best GIF on GIPHY](https://media2.giphy.com/media/GsuSyoFBCcRHy/giphy.gif)
…75bp not actively considered = gut check for markets = good
Powell was asked whether the Fed was considering 75bp and his answer was crystal clear.
- Fed is not actively considering 75bp
- but broad sense of +50bp on the table
This was a positive relative to expectations, as it gave the markets a gut check. And it looks like markets realized their assessment of conditions might be too bearish and hawkish.
Not surprisingly, Fed fund futures showed a collapse in July expectations for 75bp
- from 51% probability (too hawkish in retrospect)
- to 7%
…Fed is not trying to break the stock market
Many commentators, including the Op-ed by former NY Fed President, Bill Dudley, asserted the Fed was trying to break the stock market. ala “the Fed will tighten until the economy or stock market breaks.”
- but as abstract below highlights
- Fed is not targeting any specific asset class,
- but could be housing, stocks, spreads, etc
In other words, there is no “bulls-eye” on the back of the equity market. Of course, the Fed doesn’t necessarily want equities to soar to new highs. But this is generally consistent with our view:
- equities would be treacherous in 1H
- if inflation cools, 2H will be strong
- this has been our view, and is today considered “ultra bullish” — and that is true given how bearish consensus has become.
![Target Run GIFs | Tenor](https://c.tenor.com/3mUCm5wQH9IAAAAM/running-target-on-my-back.gif)
Lastly, rates have moved up far faster in 2022, meaning bond market doing work of Fed
Lastly, a key point the Fed has made is that it is looking for financial conditions to tighten. This sounds obvious but:
- Fed means higher interest rates
- in past tightening cycles, Fed had to raise far higher to get bonds to respond
- and in 2006 and 2017, long-term rates hardly moved
- this cycle, Fed prior raise of 25bp already triggered 130bp of higher rates in the 10-year
An example of how markets panic sooner than previously, take a look at the yield on the 10-year and compare it to Fed Funds rate. This is since 2005, or the last 3 cycles:
- in 2004-2006, Fed raised FF +4.25%, but bond market only +0.3%, hardly reacted
- in 2016-2018, Fed raised +2.25% but yields only +0.9%, hardly reacted
- in 2022, prior to May FOMC, Fed raised +25bp and yields surge 130bp.
- HUGE and FAST reaction
See the difference? The bond market is tightening financial conditions dramatically. This is doing the work of the Fed.
- we think this means the hawkish pivot by Fed will show up in financial conditions, therefore economy, far sooner.
- hence, since the bond market has panicked, the Fed has less work to do.
STRATEGY: FAANG arguably bottoming = good for BEEF. Plus, bottoming NASDAQ = supports equities
As many of our clients are aware, we believe large-cap Tech/FAANG, which has been falling since Nov 21, has become attractive on a risk/reward basis:
- valuations have fallen to “value” FB QQQ 1.15% AMZN 3.74% AAPL -0.43% NFLX 1.11% GOOG 0.88% MSFT 0.97% NVDA 1.39%
- yet, these are companies set to grow 3-10X faster than GDP
- hence, they are almost “no brainers”
There is some possible technical support coming into play as well. Our Head of Technical Strategy, Mark Newton, is on vacation this week. So, I am not benefitting from his perspective. But check out the stat flagged by Puru Saxena @saxena_puru
- the % Nasdaq 100 stocks >200D moving average is turning up
- as he notes, this is historically when NDX QQQ 1.15% bottoms
- supportive again of markets with greater upside
![Key takeaways from FOMC = gut check means markets too hawkish = good](https://cdn.fundstrat.com/wp-content/uploads/2022/05/image-55.png)
STRATEGY: We lean relatively “bullish” into 2H2022 (but also 2Q22), but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.
Stocks have continued to be treacherous in 2022. Investors are on a hair trigger.
– this is in context to a challenging 1H2022
– so jagged next 3 months
Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is
– Bitcoin + Bitcoin Equities BITO -0.78% GBTC -0.97% BITW -2.01%
– Energy
– FAANG FNGS 1.35% QQQ 1.15%
Combined, it can be shortened to BEEF.
Why is this making stronger BEEF?
– Energy supply is now a sovereign priority
– this helps Energy stocks
– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities
– if Global economy slows, growth stocks lead
– hence, FANG starts to lead FB AAPL -0.43% AMZN 3.74% NFLX 1.11% GOOG 0.88%
All in all, one wants to be Overweight BEEF
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31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here
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