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First, by using the term “bounce” to describe the rally we’ve seen over the previous eight sessions, I’m not prejudging the issue of whether this is a bounce in a new bear market or a recovery from a correction in an ongoing bull market. As I’ve stated before, nobody know which it is, only the market will tell us over time.
That said, I want to dig down into the action since Friday March 5 at 8:30am PST when the market found a bottom and has been rally ferociously since. The S&P found a bottom on Friday March 5 at 8:30am at 3,730 rallying as high as 3,980 yesterday (Tuesday March 16) morning at 8:00am PST – +6.7% to new ATHs.
This rally has been led by Growth over Value starting on Tuesday March 9, reversing a budding trend of Value’s outperformance versus Growth. The S&P Growth ETF (IVW) is +5.7% since last Tuesday (March 9) versus +1.76% for the S&P Value ETF (IVE). Again: many have questioned whether this is simply a countertrend move or mean reversion in Growth versus Value or the resumption of leadership by Growth and again: nobody knows, the market will tell us.
However, the budding bounce took a break yesterday as the indexes found their highs for the day at 8am PST, selling off the remaining five hours of the session. The NASDAQ lost 150 points the last 5 hours.
Also interesting is that Value outperformed Growth substantially during that 5 hour selloff with the S&P Value ETF (IVE) up about 20 basis points during that period while the S&P Growth ETF (IVW) was off about 90 basis points. Does that then mean that yesterday was the end of a countertrend move in a longer term trend toward Value outperforming Growth? Again: it’s worth noting but by no means definitive in its meaning.
Before turning to the crucial event today, The Fed Decision, I want to set the context by pointing out that the Fed enters this meeting with the long end of the bond market in a major selloff resulting in rising interest rates that partly reflect increasing inflation and inflation expectations.
Turning now to the Fed Decision today at 11am PST, the selloff in the bond market puts the Fed in a very tough spot. Crescat Capital recently titled their February Research Paper “The Fed Is Trapped” and BofA called today’s decision “one of the most critical events for the Fed in some time” (“The Fed must walk a fine line Wednesday as financial markets hang in the balance”, Jeff Cox, CNBC, Tuesday March 16).
The problem is that the Fed is trying to prop up an asset bubble on which the economy depends, which requires easy money, while assuring a fragile bond market that it has its eye on inflation as well, which requires tighter money. If the Fed is too dovish in support of risk assets, the bond market may sell off resulting in rising interest rates and a selloff in risk assets anyway. If the Fed is too hawkish and starts to announce plans to tighten policy, the bond market may be appeased but risk assets are likely to selloff directly. Jerome Powell is going to have to pull off an almost impossible balancing act. The reaction to the Fed Decision in the last two hours of today’s session will go a long way in telling us whether he pulled it off.