VRA Investment Update: Shades of 12/2018. End The Fed. Stock Traders Almanac; Seasonally Bullish.

Good Friday morning all.

J Powell came heavy Wednesday, raising rates as expected by .50%, but hawkish without question, targeting a peak rate of 5.1%. While the Fed broadly likes what they see regarding inflationary trends, their big concern is employment, specifically wage pressure/inflation. This is what has the equity markets concerned…will the Fed break something again…this time the jobs market.

Here we go again…shades of December 2018, when the Fed hiked rates for the 8th time of the year, with that final December hike tanking the markets and resulting in the 2018 Christmas Eve massacre. And yes, yesterday's sharp sell-off is reminiscent of how December 2018 played out. J Powell and the Fed have made it clear that they are not concerned about low levels of liquidity during the Christmas season, or the impact their actions have on investors when few are around to buy/and or support the markets. Ron Paul has been right for more than 3 decades; End the Fed. 

Do I see another Christmas eve massacre playing out this year? No, I do not…I see stocks rallying into year end and into 2023.  We first want to see the semis (SMH) and nasdaq begin to lead and turn higher. They led the way lower yesterday, so that must first change. In the ’18 sell-off the Fed’s actions led to one of the 5 best buying opportunities of my career. Again, I do not expect that this year, but low liquidity sell-offs are unpredictable. 

The bond market is calling the Fed out while the stock market is telling the Fed they will break something if they keep hiking rates into a slowing economy. 

We see it clearly in this chart. Even with the Fed’s rate hikes and nonstop jawboning, the yield on the 10 year has plummeted from 4.33% on 10/22 to todays 3.5%, a stunning decline of 19% in less than 2 months. 
Again, the debt markets are not buying what Powell is selling. 

Tyler covered this as well as anyone Wednesday, specifically around the Fed’s credibility and their focus on "increasing unemployment" (sadists, indeed). The Fed has a long history of getting it wrong. Remember, just over a year ago they said inflation was "not a problem". Then they said it was only “transitory". Exactly why should we trust them now? We should not. Make sure and give it a listen:

https://anchor.fm/podcast-c2cff90/episodes/VRA-Investing-Podcast---Tyler-Herriage---December-14--2022-e1s94kc

Long time respected economist Jeremy Siegel joined Tyler yesterday, also echoing what our favorite economist Ed Hyman (Evercore) has been saying; the Fed is overplaying their hand. Like us, Siegel expects rate cuts in 2023:

Siegel: "You can basically see that the bond market is saying 'You're too tight.' The Fed is going to have to pay attention to this. It's going to be sooner rather than later. You can be sure next year they're going to be talking about lowering rates.”

Market Watcher Bryan Rich Nails It; the Fed has a history of being VERY wrong (they do not apologize)…and the collapse in money supply (as Ed Hyman has been pointing out, practically screaming at the Fed) is the fastest on record. 

VRA Bottom Line: The VRA Big Picture

If the Fed continues down this path (their new boogeyman is wage inflation) and intentionally destroys the jobs market, then all bets are off and this market is going lower. But again, the bond market does not see that and neither do I. The Fed is “wrong”, the bond market is “right", and stocks should keep sniffing this out as well. 

Our thoughts on the markets remain unchanged from the 10/13 capitulation, one of the most textbook cases of capitulation in my career; It’s increasingly likely that the bear market is over and a new bull market has begun, just as inflation, interest rates and the US dollar have all peaked. Highly bullish and highly risk on. And talk about a great looking wall of worry that’s in place (which bull markets love to climb). We’ll be watching the semis and tech most closely for a turn. We are buyers. 

Importantly, and as we’ve been focused here for the last couple of months, this remains the most powerful piece of analytics of my 37 year career; since 1952, from the midterm lows to 12 months later, the S&P 500 has had an average return of 32% with gains in every single midterm year (18 for 18).  Again, hugely bullish for 2023. 

Final note: Because several of our 10-Baggers are small cap stocks they should soon begin to benefit from the "January Effect", which typically goes into effect from 12/14 into mid-January. The January Effect works based on year end tax selling, which tends to end on 12/14, and which produces great buying opportunities for stocks that have simply gotten much too cheap. We’re also forecasting that small caps will lead the way higher in 2023. A cycle change is taking place, after small caps trailing large caps for the last decade. 

Until next time, thanks again for reading….

Kip

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