Could the Fed spoil the current market momentum?
Abraham George Market Musings
I started the year with an optimistic report and there is more evidence that I could be vindicated. What I failed to write in the last report is the opening of the Chinese markets.
China was probably the worst-hit market of all markets last year. Now there are a lot of catalysts working in favor of Chinese stocks. Over the last several months the Chinese have introduced a number of monetary and fiscal stimulus measures and to top it up they have abandoned the zero COVID policy. They are also slowly relaxing restrictions on their real estate market. This is all very supportive of the equity markets in China. A faster change in interest rates relative to the US markets is also helping money move out of the US dollar.
For the next few years, investors who are looking for value will find it better in emerging markets better than the developed markets and now China looks like a good buy too.
Let’s have a look at our bellwether index which is the S&P 500. The downward-sloping trend line which has existed for all of last year was tested many times and was even broken a few times. Yesterday again this trend line was broken to the upside. The Nasdaq also had a breakup. The Dow which has shown more resilience and strength has been above the 200-day moving average for more than two months. The German index is trading about 27% higher from its lows last year. The Footsie is a little more than 1% off its all-time high.
60% of the US stocks that have announced results in the US have beaten their estimates. The big tech companies are still to announce and today one of the most watched results will be that of Microsoft.
All this has happened in the wake of an aggressive Fed and with a clear agenda to suppress and quash any optimism from the latter part of last year. The Fed has already communicated that they want to raise rates by another 75 or 100 points. The Fed believes economic growth will be just .5% for 2023 and unemployment will be a full one percent higher. If you hear from all the major bank talking heads and leading economists, I couldn’t find a single person who is not seeing a recession in 2023. One of the biggest contra indicators to watch in the market is the ratio of the put/call. Buying of Puts to calls is at the highest level since the gloomy times of early 2020. The monthly change in prices for over six months in the US has averaged just 0.12%. If you annualize that inflation has been running below the Fed’s 2% inflation target for some time now. We do have a GDP report announcement this Thursday which should show that the economy grew better than the 3% annual rate last quarter.
A rise of 0.25% by the Fed is fully discounted by the markets for the next FOMC announcement on 01 Feb 2023. What can the Fed do more to spoil the momentum in the markets or will the Fed leave to its own strength? If the Fed admits defeating this market is poised for a clear breakup.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.