Wall Street, or at least its public face – the mainstream financial media, is obsessed with the notion of a “Fed pivot”. It has been almost the sole mover of stock prices for months. The first half selloff was driven mostly by the growing realization that the Fed was going to hike rates. The midsummer rally was driven by anticipation the Fed might dial them back sooner rather than later. The ensuing selloff was prompted by pushback from the Fed, with everyone from Powell on down effectively saying no, we’re serious about this.
A sharp early October rally was again, driven by anticipation of the same pivot grail. Then it was squashed again by the Fed yet again underscoring its not-so-fast message.
But we’re not here to feed this insanity, we’re here to show just how irrational it is. The entire sooner-pivot-versus-later-pivot narrative is built on false premises.
Number 1 among them is that a halt in Fed rate hiking – and its opening of the door to rate cutting – will propel stock prices upward. History tells us otherwise. Rate cuts do often lead to rising stock prices, but the timing is far from assured. The 2008 bear market stands as testament to the falsity of this premise. Stocks experienced a vicious bear market in which prices were more than cut in half. Then the Fed stopped hiking rates, pivoted to cuts, and a new bull market was born.
Except that isn’t how it happened. The Fed cut rates the whole way down. In fact, the first rate cut came before stock prices even topped, let alone bottomed. The first cut of the 2008 bear market came in September 2007. Stocks peaked in October 2007. The Fed also cut rates for much of the preceding bear market in 2000-2002 as well.
In short, any rally predicated on a future Fed pivot from tightening to loosening is not only getting ahead of Fed policy, but waaay ahead … by virtue of not even being correct in its assumption that such a policy pivot would be accompanied by a market pivot. The words of George Soros’s famous dictum, ring out … “… the trend whose premise is false …”
Another Soros formulation applies as well, and that is his notion of “reflexivity”. All markets are really just interconnected parts of one overall market, and what happens in one affects the others. One cannot just draw an arrow of causality from Fed policy to stock prices. It works both ways. The Fed has told markets time and again this year that it sees “financial conditions” as a transmission channel from policy to the economy. It happens to be right in its own twisted way, but that doesn’t even matter. What matters is that higher stock prices in the Fed’s eyes mean looser financial conditions and call for more policy tightening … so higher stock prices mean higher policy rates. So there is no realistic scenario in which stock prices can sustainably rally ahead of any Fed pivot; that would simply push any such pivot further into the future. For stocks, at these prices, there’s no winning scenario. The Fed call is still in effect, and the Fed put has a strike price well below today’s levels.