If I'm Right, Stocks Are Going to Rebound in a Big Way

Written by Jason Simpkins
Posted March 18, 2022

The Fed surprised no one by raising rates this week.

It was a given, a slam dunk.

In fact, Jerome Powell really should have started tightening monetary policy last year. That's when the Fed should have begun the tapering process and started down the road to incremental rate hikes. (And if you're thinking hindsight is 20/20, just refer to what I was saying a year ago.)

Nevertheless, he fell behind on his job (Happens to the best of us!) and now he's playing catch-up.

A lot of analysts and Wall Street traders are in a similar position. They were duped by the Fed's insistence that inflation was just a transitory mirage, and so now they're overcompensating, too. That's why they've priced SEVEN quarter-point rate hikes into the market this year.

That's insane.

Look, I don't have a crystal ball. Maybe it'll happen. But if it does, the economy is going to tank so hard that the Fed will almost immediately have to backtrack again and recut rates just resuscitate it.

And if that happens, Jerome Powell should rightfully be fired. It'd be mayhem.

Yet that is exactly the scenario some analysts seem to be anticipating.

“It’s rational for the market to price in seven rate hikes for the year at this point in time," Jason Bloom, head of fixed income and alternative ETF product strategy at Invesco, said to Bloomberg. “At the very least, six and seven hikes will allow the Fed to have some ammunition to cut in the future if the economy slows down a lot.”

I keep reading that quote and it just seems crazy to me — this notion that the Fed is going to raise rates just to cut them. I can't get over it.

Thankfully, though, I don't think Jerome Powell is that stupid.

I don't think he really wants to raise interest rates. I mean, he obviously doesn't or he would have raised them in December or January, at the very least. The fact that we went three months into the year before getting our first rate hike suggests, to me at least, that he intends to slow-roll this.

And he should.

Again, yes, he should have gotten ahead of inflation, but that horse is already out of the barn. And the solution to that problem is not to kill the horse.

Remember, the whole point of stomaching higher prices was to ensure that the economy was as healthy as possible. It's like taking the full treatment of your medication even if you're feeling better. You don't want to risk a relapse.

That's always been Powell's prognosis, prescription, and plan. He may now alter it by easing the economy off its medication a little sooner than he thought he'd have to, but he can't just yank all the stimulus away at once.

It's not healthy enough for that.

No, what we're heading into now is a situation I warned about in January — one where the economy is cooling just as the Fed is beginning to take action.

Indeed, the Fed might feel a new sense of urgency to address inflation, but the damage has already been done.

Price gains have greatly outpaced the increase in wages over the past year, and while the slow emergence from COVID ushered in a consumer spending spree, it's losing its potency.

Looking at February's retail data, it's clear that the high cost of food and gas has cut into spending for other goods like furniture, electronics, and appliances.

Retail sales increased by just 0.3% last month, after a blistering 4.9% gain in January. The decline was headlined by a 3.7% drop in online shopping, but furniture sales fell 1%, sales of appliances and electronics dropped 0.6%, and spending on health and personal care slid 1.8%.

Even an ostensibly high 17.6% year-over-year increase in retail spending was largely the result of a 36.4% surge in gasoline sales attributable to record-high prices.

We're starting to see cracks in the foundation of the housing market, as well.

We all know the housing market has been a huge pillar of growth, but it was always destined to cool with interest rates on the rise and frothy prices sidelining potential buyers.

The average interest rate for 30-year fixed-rate mortgages rose to 4.27% — a full percentage point higher than it was a year ago — and it's bound to keep rising.

Mortgage applications to purchase a home rose just 1% for the week and were 8% lower than the same week one year ago. That's led to a 49% collapse in refinancing and an 8% drop in new mortgage applications.

Home prices will be the next thing to fall, and that's got home builders nervous.

That is, builders' sales expectations for the next six months declined a steep 10 points to 70, according to the National Association of Home Builders/Wells Fargo Housing Market Index, which doesn't often see such large monthly moves.

Overall, builder sentiment in the market for single-family homes fell by two points to 79 in March — the fourth straight monthly decline and the first time the index has slipped below 80 since last September, when the delta variant of COVID-19 was spreading.

"The March HMI recorded the lowest future sales expectations in the survey since June 2020," said Robert Dietz, chief economist at the NAHB. "Builders are reporting growing concerns that increasing construction costs (up 20% over the last 12 months) and expected higher interest rates connected to tightening monetary policy will price prospective home buyers out of the market."

That's a reasonable concern when you consider the price-to-income multiple for home prices is just about where it was in 2006 and 2007.

This is the kind of turn in sentiment you get in a rising rate cycle, as compared to a declining rate cycle.

Things that were considered surefire aren't so safe anymore.

We've seen similar taste changes in the stock market where sentiment has turned against technology and small-cap growth stocks.

Even recent jobs reports haven't looked as robust, despite strong headline numbers.

The ADP national employment report actually showed a loss of 96,000 small business jobs. That's kind of a canary in the coal mine situation because small businesses are usually forced to start cutting jobs before large ones. So it could portend poorly for the future.

All of this is to say that rushing to crush inflation with a rapid succession of interest rate hikes probably isn't the best idea right now.

Especially when it's not even guaranteed to bring inflation down substantially.

Indeed, while the Fed maintains some control over prices, there's a broad array of price pressures beyond its control, and raising rates won't do anything to alleviate them.

Raising rates won't stop the war in Ukraine, reanimate stalled supply chains, produce more oil, expand livestock holdings, improve crop yields, or flood the market with semiconductors.

It won't stop corporations from gouging consumers with unnecessarily high prices, either.

All of those inflationary pressures will remain — except without the growth. It's a recipe for stagflation, if not an outright recession.

For that reason, it's probably best for Powell to stay in the bed he made for himself by raising rates grudgingly. And I still believe he will.

Just for perspective, the last time the Fed raised rates, it took three years to go from 0% to 1.5–1.75%, which is exactly the journey seven rate hikes would put us on now.

That tightening period ran from December 2015 to March 2018.

No, inflation wasn't as bad back then, but it's still hard to justify condensing that much tightening into a nine-month window today.

I just don't see that happening, or at least, I don't believe that it should.

And if Jerome Powell is on the same page (which I suspect he is) then we should actually see a nice rebound in stocks when Wall Street comes to its senses and stable economic growth — if we can get past some of these unexpected challenges (looking at you, Putin).

If that's not the case, and Powell does go all Paul Volcker on us, it'll mean a brutal recession and he'll likely go down as one of the worst Fed Chairs in history.

Having said all that, I've got something really, really special to announce before I sign off today...

For the past few months, I've quietly been building a brand-new trading service that's unlike any you've ever seen before. It's called Secret Stock Files and it's going to deliver webisodes every single month.

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I really want to express how proud I am of the team that's helped me bring this project to life and I'm so confident that it's going to generate a ton of buzz that I'd really encourage you to get in before it takes off. So sign up by clicking here and you'll be alerted the second my new service goes live. 

And trust me, you're going to want to see it.

Fight on, 


Jason Simpkins
Editor, Secret Stock Files

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