I called Fed Chair Jerome Powell's bluff a week ago. Remember when he said last week that we're still far from The Fed's inflation targets?
Well, I was right to doubt him. The market didn't like his change in tone on Thursday, March 5.
You see, when bond yields are rising as fast as they have, and Powell is maintaining that Fed policy won't change, while admitting that inflation may "return temporarily," how are investors supposed to react? On the surface, this may not sound like a big deal. But there are six things to consider here:
- It's a significant backtrack from saying that inflation isn't a concern. By admitting that inflation "could" return temporarily, that's giving credence to the fact that it's inevitable.
- The Fed can't expect to let the GDP scorch without hiking rates. If inflation "temporarily returns," who is to say that rates won't hike sooner than anyone imagines?
- Fool me once, shame on me, fool me twice...you know the rest. If Powell changed his tune now about inflation, what will he do a few weeks or months from now when it really becomes an issue?
- Does Powell know what he's doing, and does he have control of the bond market?
- A reopening economy is a blessing and a curse. It's a blessing for value plays and cyclicals that were crushed during COVID and a curse for high-flying tech names that benefitted from "stay-at-home" and low-interest rates.
- The Senate will be debating President Joe Biden’s $1.9-trillion stimulus plan. If this passes, as I assume it will, could it actually be worse for the economy than better? Could markets sell-off rather than surge? Once this passes, inflation is all but a formality.
Look, it's not the fact that bond yields are rising that are freaking out investors. Bond yields are still at a historically low level, and the Fed Funds Rate remains 0%. But it's the speed at which they've risen that are terrifying people.
According to Bloomberg, the price of gas and food already appear to be getting a head start on inflation. For January, Consumer Price Index data also found that the cost of food eaten at home rose 3.7% from a year ago — more than double the 1.4% year-over-year increase in all goods included in the CPI.
The month of January. Can you imagine what this was like for February? Can you imagine what it will be like for March?
I'm not trying to sound the alarm,but be very aware. These are just the early warning signs.
So, where do we go from here? Time will tell. While I still do not foresee a crash like we saw last March and feel that the wheels remain in motion for a healthy 2021, that correction that I've been calling for has already started for the Nasdaq. Other indices could potentially follow.
Most importantly, this correction could be an excellent buying opportunity.
It can be a very tricky time for investors right now. But never, ever, trade with emotion. Buy low, sell high, and be a little bit contrarian. There could be some more short-term pain, yes. But if you sat out last March when others bought, you are probably very disappointed in yourself. Be careful, but be a little bold right now, too.
There's always a bull market somewhere, and valuations, while still somewhat frothy, are at much more buyable levels now.
With that said, to sum it up:
There is optimism but there are signs of concern. A further downturn by the end of the month is very possible, but I don't think that a decline above ~20%, leading to a bear market, will happen.