Markets React Wildly To Fed Chair’s Speech

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In his Daily Market Notes report to investors, Louis Navellier wrote: 

Will Fed Walk the Talk?

Fed Chair Powell’s speech from Jackson Hole this morning was more hawkish than hoped.

The markets have been gyrating for the last week as people place their bets on just how hawkish or dovish Powell would be today. The challenge is if the Fed really expects to employ monetary tightening until inflation recedes to 2%, it may take many months, if not years to accomplish.

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Furthermore, history says to break inflation, the Fed has to take rates north of inflation and always triggers a recession. Despite this legacy, there are plenty of investment professionals that believe a "soft landing" is possible this time. 

In his speech this morning, Powell made generally hawkish comments, such as: "May need restrictive policy for some time for price stability", "Historical record cautions against prematurely loosening policy",  "Responsibility to deliver price stability is unconditional", "We must keep at it until the job is done", "Lowering inflation will require a sustained period of below trend growth", "Failure to restore price stability would mean far greater pain".  He did throw a single dovish bone: "Likely appropriate to slow pace of hikes at some point."

The market swung wildly from the minute he started speaking, gapping down 1% then rallying all the way back to the green, and then right back down to even lower than -1%. Now the game becomes will he, and other central bankers, have the strength to walk the talk and stay tough if a recession comes? 

Hope For Soft Landing

For now, the market is likely to continue to digest the implications and may trade lower as the likelihood of a pivot has certainly been kicked down the road.

But a soft landing is still not off the table given the very low unemployment, very high cash balances of consumers and businesses, record home equity levels, and most importantly still positive earnings and GDP forecasts.

Scoop Up Bargains

With P/Es now back above 18X we may see compression here if interest rates drift higher - already the 2-year is up 4bps to 3.41%, near the high for the year - which will be most damaging to high value, low or no earnings stocks. This will be another buying opportunity for companies that continue to grow earnings faster than inflation and have reasonable P/Es.

Don't try to catch the falling knife but be ready to scoop up bargains when the market stabilizes after digesting Powell's hawkish outlook.

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