Just How Friendly Will The Fed Be?

A smile relieves a heart that grieves

Remember what I said

I’m not waiting on a lady

I’m just waiting on a friend…

–The Rolling Stones, “Waiting On A Friend”

For the past decade, the equity market has had no better friend than the Federal Reserve.

Today, we should find out how friendly the Fed will be going forward, as the market is “just waiting on a friend,” as the Rolling Stones might have put it (you know I had to put some Stones in today’s alert as a tribute to the late drummer Charlie Watts). In this case, that friend is Federal Reserve Chairman Jerome Powell.

Powell is set to deliver a speech to the Jackson Hole Economic Symposium today, and what he signals in terms of the future of quantitative easing (QE) and the Fed’s plans to “taper” QE is going to be viewed as either friendly, or perhaps not particularly friendly.

As we wrote to you in this morning’s Eagle Eye Opener, the market expects Powell to  basically repeat what he said at the July Federal Open Market Committee (FOMC) meeting. Specifically, the FOMC will discuss the tapering of QE at the September meeting, and that (as long as nothing changes) it will be appropriate to begin to gradually reduce QE in the coming meetings.

Now, the market would be more inclined to read Powell’s remarks today as much more friendly if they also were much more dovish than expected. To get that, Powell would have to repeatedly mention the increased risks from the COVID-19 Delta variant and also say that it has clouded the outlook for the recovery (or some such verbiage). If he does that, the markets may begin to price in a potential delay to the taper (in 2022) or a slower pace of tapering ($5-$10 billion/month starting in December). If this happens, I suspect we will see a rally in stocks this afternoon.

Conversely, the markets are likely to take Powell’s remarks as hawkish if he implies that there has been enough progress on the economy and on the employment front to basically begin the countdown clock on the tapering process. If this happens, expect a mild pullback in equities that could easily undo the past week’s rally (and then some). However, unless Powell is shockingly hawkish (which is very unlikely), this might cause volatility, but it won’t materially derail the rally.

If history is any guide, it should teach us that it’s very unlikely that Powell will deliver a hawkish surprise today. Inflation, while high, has shown signs of being temporary, inflationary expectations have come off recent highs and the Delta variant of COVID-19 has slowed the economic recovery. Given that, it would be quasi-shocking if Powell was hawkish.

Instead, the most likely outcome is that the Powell speech repeats what we already know, i.e., that tapering is coming, probably in December and that we’ll learn the pace of it in just under a month at the Sept. 22 FOMC meeting.

As for the market action this week, we saw a nice rebound in stocks, with the S&P 500 climbing about 1.3% over the past five trading sessions. International markets also gained ground, with the benchmark iShares MSCI EAFE ETF (EFA) adding 1.4%. It also was a good week for the Tactical Trends Portfolio (TTP), as we saw nice gains in our combined six positions.

If you have yet to add some of these stocks to your portfolio, I recommend you begin the process. After all, there is no time like the present to make a good decision for your future.

Finally, given the death of 13 members of the U.S. military (10 Marines, two soldiers and a Navy corpsman) and another 18 wounded in Afghanistan this week at the hands of an ISIS suicide bomber, I want us all to take a moment of silence, right now, in memory of these fallen brothers.

President Biden has vowed retribution, saying, “We will hunt you down and make you pay.” Let’s hope that he keeps his word.

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