Will Weekly S&P Close > 4050 Buoy Markets?
Abraham George Market Musings
It is the week of the long-awaited first World Cup football in the Middle East. Already there have been a few upsets that make the game interesting as we progress out of the group games. It is also the week of the most celebrated yearly US holiday weekend. With markets having gained momentum to the upside there is more to be cheerful as the US winds down to this Thanksgiving.
Let’s take stock of what has happened so far. Inflation was the real culprit of all this unwanted volatility in the markets. It is not really inflation but the Fed’s way of handling it and the narrative they wanted people to believe.
The COVID-related lockdowns forced the Fed to follow an excessively easy monetary and fiscal policy. They fueled that with unprecedented money supply growth too. If the money supply grows faster than the economy’s ability to produce goods and services you get inflation. It is as simple as that.
The biggest sin the Fed committed was to ignore the ugly head of inflation and unanimously call it “ transitory”. There was not a single Fed official who went against what Jerome Powell communicated to the public.
Even when they realized that they must change course and raise interest rates they continued to pussyfoot with their bond-buying program (QE).
But very soon they realized they needed to press on the accelerator and were on a mission to crush demand and jobs. There was unanimity among the Fed officials in their communique. They raised rates four times in a row by 75 basis points. This has never happened in history before. In the process, they crushed the stock market. The dollar went through the roof. Economic growth got stifled and also produced an inverted yield curve which normally is a precedence before a recession. Even after creating a deflationary environment, they are still pursuing higher interest rates. While all voices from the Fed so far have been in unison, dissenting voices are starting to appear from regional presidents. The Fed clearly has messed up on the leads and lags in the economy.
However, it looks like the Fed will switch to smaller hikes as per the November FOMC minutes. This surely has had a positive impact on the stock markets. Compound to that for the next two years with a divided congress, we will get gridlock on Capitol Hill. That will lead to scrutiny of the excesses in the past two years. That can lead to investigations and legal challenges of president Biden’s executive orders (e.g. the Biden student loan cancellation has been blocked by a federal judge). All this adds to a disinflationary outlook going forward.
I discussed in one of the past articles that the midterm elections are historically good for stocks. Going back more than 70 years there has never been a 12 - month period, following a midterm election when stocks were down.
The record so far is 100% for a very long period in history. The average one-year return following the mid-term elections of the last 70 years is 15 %. That is double the long-term average return of the S&P 500.
Even when the S&P 500 flipped below the 200-day moving average last April I was not convinced about the long-term sustainability of a short position. There were tactical opportunities to be short and long but on balance I maintained a view to getting long on any serious weakness. It has served well so far to go against some of the biggest managers in the market. Though attempts to break above the 200-day average have so far failed, I think the ducks are lining up for a convincing move up into the year-end.
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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.