Federal Reserve Message to Bull Stock Market: We’ll Break You

Not looking at actions tick by tick Sometimes has its advantages.

That’s where I am right now after spending a week in sunny Cannes, France with my colleagues at Yahoo covering the Cannes Lions.

We laughed, we didn’t cry, we talked to big names like Kevin Hart and Pinterest CEO Bill Ready about business matters, and we ate some incredibly fresh food that, oddly enough, didn’t seem too inflationary. I even tried dancing at a late night party (it was for business, people).

One thing we haven’t done is pay attention to actions every second. It was as refreshing as the ocean water I let touch my calves during a 15 minute break after finishing recording on Thursday. At least for me, this market detox has proven incredibly helpful as I come back to reality in increasingly hot New York City.

My brutal take on the markets: The Fed is trying to club the bulls over their heads to remind them who’s boss. It might be wise for the bulls who have been betting on AI stocks, tech names like Microsoft and of course Tesla, to respect the mighty Fed club and pull their horns a bit.

Sentiment changed on Wall Street to start the summer, largely thanks to new information from the Fed. The Fed’s pause in raising interest rates a few weeks ago spooked investors because it’s clear that a pause doesn’t mean there won’t be any more rate hikes. Powell’s testimony last week reinforced the view that two more rate hikes are coming this year to fight inflation, perhaps to the detriment of the economy.

I expect a similar warmongering tone to emerge from Powell’s two speeches later this week.

“One of the big stories this year is that central banks continue to surprise markets with further rate hikes or hints of more to come,” Bank of America economist Ethan Harris said.

Harris is on the right track with this observation and is right to question the markets’ resilience amid these nasty surprises.

“Markets have also proven remarkably resilient with only a slight tightening in financial conditions. Despite central banks’ rapid catch-up over the past year, there have been very few financial ‘crashes’.” The only shock potentially serious – US regional bank stress – appears to have been circumscribed by very aggressive actions by regulators. It’s striking how strong global equity markets are compared to pre-COVID levels,” Harris added.

Well-respected Goldman Sachs strategist David Kostin also laid the groundwork for more near-term pressure on markets as investors simmer on Fed confusion.

“While our baseline view remains that the S&P 500 will rise 3% to 4,500 by the end of the year, the narrow market rally, lofty valuations and stretched investor positioning pose risks to the drop,” Kostin wrote in a weekend note.

Kostin continued, “While controlling inflation requires the Fed to implement additional policy rate hikes, stocks with ‘quality’ attributes like strong balance sheets, low volatility and high returns on the capital should outperform.

It’s a counter-mood to the risk-taking bull trend that sent markets to record highs just a few weeks ago and the likes of Nvidia to a $1 trillion market cap.

Fight the Fed at your peril…but know that I didn’t fight the currents on the beach in France. I went back to my towel to soak up the sun – which was the right decision.

Brian Sozzi is the editor of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Advice on the banking crisis? Email brian.sozzi@yahoofinance.com

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