Post-Election Euphoria Has Ended, But Is the Uptrend Dead?
Jerome Powell's hawkish comments provide the bears with ammunition, while Trump's honeymoon period is losing some of its glow.
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The market move following the Red Wave election was record-setting as investors embraced a Goldilocks on steroids economic environment. Not only did expectations of economic growth skyrocket, but concerns about inflation were shoved aside.
Unfortunately for the market bulls, economic reality is not so simple or easy.
There have been signs in the economic data that inflation is sticky to the upside, and interest rates have been trending steadily higher since the Fed's half-point cut. On Thursday, Fed Chair Jerome Powell cemented the worries when he stated: "The economy is not sending any signals that we need to be in a hurry to lower rates." That is quite obvious to most economists, but the Fed had not provided any hints that it would slow the pace of expected rate cuts.
Following Powell's comments, the odds of a December quarter-point cut fell to about 62% from a near certainty a month ago. What is more troubling is that expectations for rate cuts in 2025 have been steadily declining. There isn't any major concern about a sharp rebound in inflation but the worries are increasing and will be a market headwind.
The question now is whether this deterioration in the Goldilocks economic narrative will derail the market uptrend. It is too early to jump to a conclusion. The price action will be the best clue of how the market feels. While there is still very elevated optimism about economic growth, as worries about inflation increase it will impact valuations.
The market has been in a sweet spot for a while, during which there was strong growth but a dovish Fed. If the Fed changes its bias, it won't be easy to overcome.
In addition to the concerns about the Fed, Trump's honeymoon period has lost some of its glow following controversial picks for his cabinet. The loyalty of some Republicans will be tested and that could impact optimism about policy.
The indexes are gapping down on Friday morning as it digests the Powell comments. The Russell 2000 IWM is already starting to fill the post-election gap, while the senior indexes are not yet there.
The key now is finding some technical support. If the post-election gaps are completely filled, it will have a very negative impact on sentiment. It will take longer to digest, but watch for rotational action and see where money flows as the corrective process proceeds. A long list of stocks will be great buys at lower prices.
At the time of publication, Rev Shark had no positions in any securities mentioned.
