Can Investors Trust Words from the FED?

Last Friday, U.S. Federal Reserve Chairperson, Jerome Powell, made an eight
minute speech stating that the Fed was going act tough by raising interest rates
and keep them high into 2023 in order to combat rising inflation. U.S. stock
prices fell four days in a row with the S&P 500 dropping 8% since the August
16th high. Was this warranted? First of all, it is not unusual for stock prices to
correct after rising 17% from the low in mid-June. However, should investors take
Jerome Powell at his word? You may remember how Powell said he was going to
keep raising interest rates in early December 2018. Stock prices fell 20% by
December 24, 2018. He realized the error of his ways in early January 2019 by
being at pains to say that any interest rates would be based on economic data, not
on a pre-planned policy. Stock prices rebounded to record highs a few months
after that. If that was the case then, should investors and borrowers become
anxious over what Powell said last Friday?

I have been reporting how oil and gasoline prices have dropped considerably in
recent months, which is positive for inflation. I thought it would be good for you
to hear what a very wise and experienced investment expert said about the record
of the Fed forecast for interest rates and what he sees in the most recent inflation
data.

Jeremy Siegal is a Professor of Finance at the Wharton School of the
University of Pennsylvania. He has commented extensively on the economy and
financial markets and appears on television networks regularly. He has also
written several books. Most importantly, I have found his opinions and forecasts
to be very useful.

This is what Jeremy Siegal said about stocks, inflation, interest rates and the
Fed in an interview with Scott Wapner on CNBC’s Closing Bell today.

"The price index in the ISM report this morning (Institute of Supply
Management) just had the second biggest decline over the last two months in 70
years. This was only exceeded by the Great Financial Crisis. The inflation news
on the ground is coming in really well, so I was shocked when Powell was acting
last Friday like things are just getting worse and worse and that he has to stay the
course. I looked back at last September’s meeting. So, this is very important. Last
September, half of the FOMC (members of the Federal Open Market Committee
who vote on interest rate adjustments) said there was no need to raise interest
rates in 2022. Five said rates would rise by ¼% and the most hawkish members
said we may have to raise rates by ½% by the end of 2022. So, do they really have
the ability to see the future? Not really. Have their predictions been good? It was
just a year ago when everyone said I am not even thinking about thinking about
raising rates in 2022. The Fed certainly didn’t do what they said they were going
to do last year because things got a lot worse.

You know I was one of the very first to tell you we are going to have terrible
inflation in 2020 and 2021 on your program. I said the Fed was farther behind the
curve than I have ever seen them before. They were way out in left field. So now
they got religion. Oh my! We are really late so now we are going to show you how
strong we are going to be.

When you are speeding at 120 mph, you don’t slam on the brakes to go to 0
mph in 5 seconds. You have to be measured. We have had no growth in the US
money supply in 4 months. There are rarely times in history when that has
happened. So, the Fed has slowed monetary growth.

We see prices on the ground that are going down. Listen, if I saw real estate
prices, sensitive commodity prices and the money supply still growing, I would
not say it is time for the Fed to pivot. And it is not time to pivot yet and start
lowering rates. But, to say that we are going to keep on raising rates through 4%,
4 ½%; you know people are calling for 5% or more, I think is denying what facts
are on the ground.

When you have 26 out of 27 inflation indicators coming in below expectations
over the last 30 days, you know how rare that is on inflation? I think this is telling
you that you have got a hold of this problem belatedly.

This is obviously very favourable for the stock market. I think the stock market
is worried about over tightening. The indicators I look at say inflation is moving
down. I think the stock market is pretty smart and they are looking on the ground
and they see moderation and they would love at least for Powell to acknowledge
that there is moderation on the ground prices and that they will be looking at that
rather than saying we are going to stamp out inflation until we see it going down.
He has to tell us what indicators he is looking at. The indicators I am looking at
show that inflation is moving down."

The inflation data that Jeremy Siegal has been seeing matches my own
observations. You can see that what the Fed has projected and forecast has been
quite different than how they have acted. I do not think investors, business owners
and borrowers have taken this into account after listening to the remarks made by
Powell last Friday. He has reversed course completely before. He made the
mistake of relying on a strategy rather than the data in late 2018. According to the
inflation data over the last two months, he may be repeating that mistake.

Inflation data is falling across the board. When the Fed starts focusing on the
data, their views and forecasts could change quickly.

The question for investors in stocks is whether the rally since June is a rally
within a longer-term decline, or is this the start of a new long-term uptrend? The
weight of the statistical data I look at suggests that the momentum displayed since
June has been too strong for this to be a rally in a bear market. Interest rates may
not rise as much as expected with the sudden drop inflation levels.

The S&P 500 held at the important 3,900 level today. The short-term oscillator
I look at for the S&P 500 was at the level of 0 this morning before the S&P 500
closed with a gain. There have only been three other times that this has happened
in the last 20 years. The first time was when stock started a 5-year rally after the
U.S. invaded Iraq in March 2003. The second time was at the market bottom
during the Greek Debt Crisis in June 2012. The most recent time was on
December 24, 2018, the exact day of the market bottom after a 20% drop when
the Fed said they were going to raise interest rates. Stock prices began powerful
long-term uptrends after each of these instances. Please see the red arrows
showing when this happened in the chart below (From Rifinitiv) It will be very
interesting to see what happens in the weeks ahead. Have a great long weekend!

Here I am giving my 7-year old grand daughter the adventure of standing
underneath a waterfall at Rainbow Falls. See the rainbow in the top left hand
corner of the photo. Have fun and be safe!