Powell Yaps, Slams Market
While the central bank’s steps to slow the rate of investment, spending and hiring “will bring down inflation, they will also bring some pain to households and businesses,” Mr. Powell said", according to WSJ.com. But will the Fed's tightening also kill the stock market?
The short answer is yes! The Fed chairman's speech today is another trigger for the next leg in the Big Bear that we are in right now.
Here are the key factors behind the next leg down:
• Fed raising interest rates thus competing with stocks and reducing stock values
• Fed reducing money supply in the economy thus reducing liquidity for the stock market
• EPS estimates are declining because…
• …the Fed caused inflation is destroying real wages leading to…
• Reduced consumer demand for everything thus leading to…
• A recession
So why now?
Yes, the latest CPI was a bit of a pause. So many people thought that the Fed would not raise rates again. After all, inflation was transitory and had stopped going up.
But the Fed sees the underlying problems. PPI is still going up. Raw materials have started another bull market. Real wages are declining yet employment costs are increasing.
So he used his Jackson Hole speech to outline the Fed's policy for the near future, at least until the end of the year. Now the market thinks that the Fed will raise rates two more times this year and continue their quantitative tightening program.
This is a double whammy for the stock market. It cannot withstand the pressure of the Fed raising rates and shrinking money supply. This should be a second bell ringing in a new leg to the downside.
So how do we make money?
I think that NASDAQ type stocks will underperform so I want to do trades like the following:
• Short QQQ
• Buy SJB
• Short XHB
• Short LEN
Of course, I recommend that you get my precise trades by subscribing to Wall Street Winners at wsw2021.com.