Oct 24, 2022
VOT Research Desk
Market Insights, Considerations & Analytics
According to Fundstrat, the Fed is recognizing that inflation is a lower “black hole of agony” than previously believed.
The company cited Fed members’ more subdued remarks from December that implied a halt.
According to Fundstrat, equities might rise 16% until the end of this year if the focus on rate hikes changes.
Fundstrat claims that the Federal Reserve is recognizing that inflation is less of a “black hole of agony” than previously thought.
The company cited subdued comments made by Fed members in December, which suggested a halt.
Fundstrat says that if the focus shifts away from rate hikes, stocks could rise 16% this year.
According to Fundstrat’s head of research, Tom Lee, the Federal Reserve is beginning to realize that inflation is a smaller “black hole of pain” than previously thought. A pivot or pause on rate hikes could cause stocks to rise by more than 16% by the end of the year.
Lee cited Fed officials’ recent remarks in a note on Monday, which tempered some of the hawkishness that has shook markets this year and caused the S&P 500 to fall 25% since January. Even though inflation is still high, Fed officials Neel Kashkari, James Bullard, and Loretta Mester have said that the Fed might stop raising rates in December. Stocks rose last week as a result, despite mixed corporate earnings reports.
Lee stated, “The Fed sees that inflation is becoming less of a black hole of agony.”While skeptics contend that this is because something is “going to break,” Fed members’ comments indicate that it may be more due to an acceptance that monetary policy takes time.
Inflation is also trending down, according to other experts, which raises concerns that the Fed may over tighten financial conditions if it continues with more aggressive rate increases. The Consumer Price Index data and inflation “on the ground” have a lag of approximately 18 months, suggesting that the inflation picture may be significantly less gloomy than the Fed initially anticipated.
Regarding CPI, a nuanced discussion is also taking place. Lee stated, “The Fed conditioned markets to focus solely on ‘hard’ data.”He continued, “Many investors are beginning to realize the error of comparing leading [CPI indicators] to lagged CPI.”
The Fed is keeping a close eye on signs of a cooling labor market to determine whether inflation is falling.
Lee remarked, “All of this, in our view, are reasons that any equity rally should exceed that seen in July, which was the ‘false dawn of a Fed pivot,’ noting that the rally in July lasted for 23 days and saw stocks gain 16%.In an impressive turnaround last week, the S&P 500 gained 3 percent, supported by hopes that the central bank will relax its aggressive inflation control measures.
However, other analysts remain skeptical due to the fact that a Fed pause in interest rate hikes would not be sufficient to boost stocks and would only last so long as the Fed signals a genuine policy shift. A pivot is also unlikely to occur until the Fed receives clearer inflation data, the labor market softens further, or the financial system breaks, casting doubt on any potential upside for stocks.
