Federal Reserve Chairman Jerome Powell speaking in Jackson Hole on Friday sought to spook markets, which are trying to move to the point a few months from now when interest rates will peak. without causing serious damage to stocks or the economy. In bringing to the attention of investors and the general public that the fight against inflation remains idealistic, will involve “pain”, and will not end until the price trend declines to the Fed’s 2% target level. , Powell has essentially managed to keep the wall of anxiety high and long. With Friday’s 3% drop, the S&P 500 was quick to team up, with traders’ reflexive reactions conveying a sense of concern that, for Powell, a recession could be the panacea. prescription for inflation rather than just an unfortunate side effect. Rough Tools At the very least, this is the simplest account of the interplay between a blunt Fed chair flaunting rudimentary central bank policy tools, and a market already in retracement mode. a massive rally, a late summer Friday session, and an investment still lurking around in the community. Still, it helps fill in the context of the market’s physical position, already subdued investor sentiment, messages from other markets, and some helpful trends in the inflation indicators that appear to be on the way. conducted. The index fell 3% shortly after the Fed’s purported attempt to tighten financial conditions recently eased that cannot be dismissed as a technical move, low volume in August. cut through the previous August low in the S&P 500 near 4080, also a 20-day low, often used by traders as a level to hold if a short-term rally is to be trusted . And Bespoke Investment Group notes that over the past 70 years when the S&P 500’s 3% loss occurred on a Friday, the next trading day has seen an average drop of 1.5%. However, from the big picture, the market may just be going through a typical setback to consolidate the nearly 19% gain in two months from the June 16 low to the mid-August high. The S&P 500 is down 6% from its recent peak, retaining more than half of the ground gained during the rally, though just over 1% above its 50-day average. The retracement didn’t falsify what some observers see as an important and relatively rare momentum signal that was triggered during a strong, broader rally through July, this in the past. foreshadowed positive returns for the indices in the following months. Veteran technical strategist Jeff deGraaf of Renaissance Macro Research has placed a lot of weight on these momentum indicators, despite the lack of a more convincing fundamental case for significant upside. Writing the day before Friday’s sell-off, he noted that such a tumultuous outlook is not unusual at such times: “Evidence of one of the most hated rallies of the past few years has been a huge success. is clear in [heavily net short] Position the S&P’s future, and honestly, we don’t blame them. Bull markets start with skepticism and as prices move higher, a story sprouts and as trends establish themselves, that story develops into the main theme. here) is tested is unknown, although it suggests that the low will not easily give way without an even more severe macro shock. attributed to famous investor Marty Zweig: “Don’t Fight the Tape” and “Don’t Fight the Fed.” The tape, as noted, sends a positive message. However, the Fed is outright hostile, vowing to raise interest rates into “limited” territory and keep them there for a long time, into an economy that is slowing, stagnating, or possibly shrinking. Facts – never mind a broken housing market or an inverted Treasury yield curve. For Dwyer, it’s formula f or a cap market not far from recent highs even if it should turn out to be quite attractive back near mid-June depths. With the idea that it was a “hated” rally, it was clear, at least, that investors never ignored their worries. The American Association of Individual Investors poll, for 21 consecutive weeks, has more people saying they are bearish on stocks over the next six months than they are bullish. One more week and it will become the second-longest series since 1987. The National Association of Active Investment Managers has its own weekly survey of investors’ equity exposure. professional tactical investment, fell from neutral a few days before Friday’s boom. In a bear market like this one, with monetary policy woes, sour sentiment in itself is not a reason to drive away the crowds and indulge in risky assets. But it also suggests that it probably won’t take much more market weakness or Fed growls to turn pessimism into polar opposites again. Perhaps it is worth noting that the bond market on Friday barely moved, traders saw no need to re-price in response to Powell, which had pushed yields higher in the previous two weeks to replenish. supplement the expected rate hikes that Powell promised in his speech on Friday. . This could mean that stocks are once again behaving like a token asset class, more susceptible to spikes and perhaps in the woes of systematic funds, following a trend that Goldman Sachs has already shown. warns of becoming a net seller on certain index levels, volatility indices, and before potentially rebalancing at the end of the month from stocks with asset allocation strategies. Bonds may also have combined a drop in core PCE inflation barely noticed in Friday’s official consumer data and a further drop in the U.S. survey of inflation expectations. study in Michigan. In fact, Powell almost had to talk hard about “higher rates for longer” whether that’s a possible future path or not, so that the market doesn’t get too giddy and resist his tightening efforts. And the bond market reflects the range of results after a slight increase in interest rates in the coming months. The Fed is regaining credibility, Blackrock Chief Investment Officer Rick Rieder responded to Powell’s remarks by noting that the Fed has clearly regained its credibility, as evidenced by inflation expectations based the market is retreating to the long-term “normal” level of less than 3%. This would allow the Fed to “Hurry up and wait,” he said, with another sizable hike, possibly one or two smaller ones, bringing policy rates into the restricted zone, then “the Fed there’s a chance to relax. Fed Funds rates are historically higher for a longer period of time.” It may be hard to believe that an opportunity to relax could soon present itself after days like Friday, but Eventually the stress will release and the pain will lessen.