Chair Powell has Spoken

On Wednesday, Federal Reserve Chairman Jerome Powell announced a .75% raise in the Fed Funds rate (which was fully expected and already priced into the markets) but then stated “ it’s very premature to be thinking about PAUSING future rate hikes”. The latter part was NOT anticipated and the market sold off 500 Dow points very quickly. 

I am afraid this official stance by Powell for “higher for longer” means the market could be under continued pressure. In the short term, not even mid-term elections next Tuesday (some are speaking of a red wave) nor seasonality factors that historically favor stocks from November through April are enough to counterbalance the blunt instrument of higher rates.   

There are however some longer-term POSITIVE signs for the market though. Among them are the following; 

  • Valuations have come down substantially 
  • Peak inflation appears to in the rearview window 
  • Q-3 earnings announcement in many cases while not great have been coming in ok except for the FAANG names  
  • Share buybacks will resume again soon and therefore put somewhat of a floor under individual stock prices 
  • Employment and therefore consumer spending (70% of the economy) is holding up quite well 
  • Innovation (see below) 

Accordingly to Argus Research October 24, 2022 “If U.S. corporations weren’t innovating, creating new products and services, and moving into new markets and applications, the domestic economy would be contracting, not expanding, and capital would not be flooding into the country. Particularly at this juncture of the market and economic cycle, when uncertainty is high due to high inflation and rising interest rates, we look for innovative companies to navigate the challenges successfully”. We concur with Argus particularly given the continued high spending by many companies on research and development. As the macro environment slows (due to higher rates) R&D budgets will no doubt come under some pressure. But on a longer-term basis innovation and the companies that bring it will win. 

As always time will tell how this all plays out. In the meantime, our “barbell strategy” of combining high-quality growth and value stocks should provide a smoother path till the NEXT bull market starts. Be sure to call or email us if you want to speak about your specific portfolio, the economy or financial markets.