Market report

Stock market rule: the Federal Reserve is always right.

February 6, 2023
Stock market rule: the Federal Reserve is always right.
Euphoria after the Federal Reserve's press conference, the party on Wednesday is followed by a hangover on Friday.

Chart of the week

Source: FRED Economic Date, Chicago Fed National Financial Conditions Index (NFCI), 03.02.2023

The chart shows the Financial Conditions Index in the USA. If the value is below zero, this shows that it is harder for companies to raise new money than a year ago. Falling values mean that it is easier for them to obtain financing than in the previous month.

Why this matters
Since October 2021, it has become harder and harder for firms to get financing. This was due to steadily rising interest rates, but also tighter requirements from lending banks. Especially growth companies (growth stocks) are dependent on favorable financial conditions, as they often do not (yet) make profits and invest all their money in growth. This then also led to the big slump in technology stocks.

Since December 2022, conditions on the financial markets have been improving again. That was the basis for the very strong start to the year for technology stocks. In some cases, they gained more than 40% in a single month.

Euphoria after the press conference of the US Federal Reserve,
In January, we saw the best return on the stock markets since 1975. 6% doesn't sound like that much, but extrapolated for the year, that would be 72%.
Based on technical analysis, almost all stock markets are severely overbought and investors are too greedy. There is no stopping now, especially retail investors are buying wildly. Therefore, most market participants assumed that the Federal Reserve (FED) will put an end to this hustle and bustle at this Wednesday's meeting.
It was expected to tighten the rhetoric to push the Financial Conditions Index back up. This would put the brakes on the tech rally since the beginning of the year.

But none of that happened. Jerome Powell was more relaxed than ever at the press conference and there was none of the expected side-splitting to slow the January rally. The market shot up almost 2%.

Source: Mario Locher, 28.01.2023, Time stamp: 03:34

The chart shows how sharply Americans' consumption (orange line) is slumping and the economy is cooling. The upper band of key interest rates is now higher than inflation. The Federal Reserve is confident that the economy is cooling and inflation is falling.

Wednesday's party is followed by Friday's hangover
It was such a nice week after all, if only it weren't for Friday. On Friday, the new figures on the labor market in the US were published. The creation of 185,000 new jobs was expected and an unemployment rate of 3.6%.

Source: Twitter: Besboke, @bespokeinvest, 03.02.2023

The chart shows how many times behind one the analysts miscalculated their predictions and the values turned out higher than expected. For the past 10 months, analysts have been predicting a cooling of the economy that just won't come.
The published figures hit like a bomb. Over half a million new jobs (517,000), the unemployment rate drops to 3.4% and the average labor cost per hour increases by 4.4%.

Source: FRED Economic Date, Unemployment Rate (NFCI), 03.02.2023

This brings the unemployment rate down to its lowest level since 1970! This is, of course, good news for all those who have newly got a job. But the U.S. Federal Reserve will now have to tighten the course massively. It seems that the U.S. economy is not cooling off after all.

Source: Twitter: Otavio Costa, @TaviCosta, 04.02.2023

The graph shows how the number of vacancies (blue line) and labor costs (brown line) are positively correlated.

Source: Twitter: Mohamed A. El-Erian, @elerian, 02.02.2023

The chart shows that there have been consistently more job openings than job seekers since October 2021. This normally leads to rising wages, and rising wages lead to higher inflation.
The relaxation of Jerome Powell, which he still showed on Wednesday, should thus have evaporated. The stock market party was brought to an abrupt end. Until next week, hopefully positive earnings reports of the companies, the mood turns again.

Source: Mario Locher, 28.01.2023, Time stamp: 11:33

The chart shows the forecast of how high interest rates should rise, how long they will then stay that high, and when the Federal Reserve will lower rates again.
The red line is derived from the opinions of voting members at the Federal Reserve and the green line is the current opinion of the market. Is the Federal Reserve too pessimistic, or are investors too optimistic?
There is an old stock market rule about this: "The FED is always right." The central bank is always right.
As you can read in the market reports of the last few weeks, we are very positive about the medium term. All negative developments have already been factored in and included in the stock valuations. We therefore see the current correction, which can last a good 1-2 weeks, as an opportunity to continue buying.
In the bond area, we had actually intended to switch from the absolute return strategies invested for 3 years back to normal long strategies. We postpone this for the time being and wait until the expectations of investors have adjusted to the forecasts of the Fed.

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