The guest commentary below was written by Joseph Y. Calhoun III, Founder & CEO of Alhambra Investments. This piece does not necessarily reflect the opinions of Hedgeye.
I thought of Gilda Radner this past week. Actually, I thought of a character she created on the original Saturday Night Live, Emily Litella, who was a regular on the Weekend Update segment.
She’d start to rant about something topical, getting it completely wrong at which point Jane Curtin or Chevy Chase would explain it to her and she’d respond. “Oh. Well. That’s completely different. Never mind.” (For those of you too young to remember Gilda, here’s a link. Radner was a rare talent taken from us too soon by ovarian cancer.)
There is no better description of the market moves that happen in the week of a Fed meeting. There’s almost always an initial market move based on a knee-jerk interpretation (or misunderstanding) of the Fed’s statement or Jerome Powell’s press conference performance. And then after a little bit of reflection, the market seems to say, like Emily Litella, well that’s completely different, never mind.
At which point all the previous movements get reversed and we’re back where we started, as if the Fed didn’t really do or say anything of substance at all. Which is, of course, usually accurate and should have been obvious from the beginning. But the Fed has to talk and traders gotta trade so after every meeting we get the Emily Litella memorial market dance.
You’d be better off taking Fed meeting week off and watching reruns of the first few seasons of SNL.
And so, last week the Fed met and for a few hours everyone thought it meant one thing but by the next day, everyone had decided that it didn’t mean that at all. In the end, bond yields barely moved and the outlook for the economy only changed mildly and I would say positively.
The 10-year Treasury note yield was 1.46% on Monday and 1.45% on Friday. The yield rose from Monday to Wednesday and fell Thursday and Friday. The 10-year TIPS started the week yielding -0.85% and ended the week at -0.79%. If you take real yields as a proxy for real growth – and directionally that’s a good way to think of things – then real growth expectations rose on the week while inflation expectations fell slightly.
And since that is what the Fed is trying to do – as if they had any control over such things – I’d say that was a pretty good week for the home team. But c’mon. We’re talking about 7 basis points here. It means as close to nothing as you can get without it actually being nothing. In other words…never mind.
I know what you’re thinking right now. If the Fed meeting was a big nothing, why did we see such big moves in other markets?
Large-cap stocks were down 2% on the week and small-cap double that. The dollar was up 1.8%, gold was down 6%, copper down 8%. Crude oil was actually up slightly on the week but energy stocks were down over 5%. Platinum was down 9% and Palladium nearly 11%. Agricultural commodities all took a big hit. Large-cap value stocks were down but growth stocks managed a small gain.
It was almost as if the Fed actually did something.
Well, actually, amid all the discussion of dot plots and timelines it was almost missed but the Fed did actually hike rates last week. They raised the rate they pay on excess reserves and the reverse repo facility by 5 basis points each. That of course means….well, not much actually. Never mind.
One thing I think most investors don’t appreciate is how much of what goes on day to day in markets is just noise. Markets don’t always move on fundamentals.
In fact, I’d say they rarely move on fundamentals because most investors – and I use that term very loosely these days – have no idea what the fundamentals are.
Markets are nothing more than groups of people acting on imperfect information in less than ideal circumstances with their – or someone else’s – life savings on the line.
If you think people are making intelligent, rational decisions in that environment I’d suggest you spend some time in the bowels of Reddit or Twitter or even, God help you, TikTok. That will certainly cure you of that particular delusion.
All that happened last week is that markets that had moved too far in one direction moved back in the other direction. Commodities had made a big run higher, fueling the inflation fears everyone has been talking about. Part of that was fueled by the widespread expectation of a weak dollar that I warned just last week was looking less and less likely, at least right now.
The dollar bears had every opportunity to push the dollar lower, out of the bottom of the range it’s been in for six years and they just couldn’t get it done. And the longer it sat just above that level the less likely it was to fall through it. It was just a matter of time before the bears threw in the towel or the bulls got the upper hand. I’d also add that last week’s dollar move higher wasn’t any more significant than the previous move down. We’re still stuck in the same range as before and I think there is way too much uncertainty right now for a big move in either direction.
The same is true of the value versus growth debate. I heard multiple market commentators last week say that the change in the Fed’s dot plot pushed investors to sell value and buy growth on reduced growth expectations.
I say hogwash.
The Fed has no idea when they are going to hike rates because they have no idea what the economy will do between now and 2023.
Hell, they have no idea what the economy will do between now and the end of the year. Nothing changed last week. The economy is still on the same track it was before the Fed meeting. It continues to recover at a pretty steady pace. And until something real changes, that’s exactly what we should expect for the immediate future.
The correction of overextended markets is just technical, an adjustment of an extreme. It’s what happens in systems like markets. It doesn’t have to “mean” anything other than, in this case, some people felt some urgency to take profits on some assets that had run up in price. And it probably isn’t over by the way so if like us you’ve raised some cash recently, you probably want to be patient.
That’s the kind of virtue signaling every investor should practice.
Joseph Y. Calhoun III is the founder and CEO of Alhambra Investments. A veteran of the Navy's Nuclear Submarine program, Joseph drew on his Naval experience of having "a process [and] a procedure for everything" when he constructed Alhambra's original "Fortress Portfolio". The portfolio was designed to generate strong overall returns while weathering very few down years, and formed the genesis of the company and Joseph's "reason for founding the firm".