Powell’s pivot for inflation is turning the dealer pandemic playbook on its head

The market is puzzled.

Federal Reserve Chairman Jerome Powell has thrown a wrench in the investor’s book. Worried that they could be hurt by the Omicron variant, which continues to slow growth and exacerbate supply chain problems, investors bought technology and sold cyclical stocks.

Now Powell has noticed that they are getting more aggressive due to omicrones and ongoing supply chain problems.

Powell may have used omicron as an excuse to (“temporarily”) get rid of a guideline that was no longer useful, but anyway.

That the Fed was becoming more restrictive, not less restrictive, was not part of the market narrative.

Now even the most expensive technology is at risk.

With Covid, the Delta variant and now with omicron, the market has come to believe that technology wins, no matter what.

But with Powell telling the world that he wants to get rid of the word “temporarily” and hasten the cut, and that implies that interest rates are rising faster than expected, the knee-jerk reaction should be to sell technology.

What should I do?

That’s the riddle: cops keep saying the consumer is strong, but early Fed tightening is the big killer for bull markets, making it harder to argue about “buy the dip”.

“We thought the markets were win-win,” said Matt Maley, equity strategist at Miller Tabak. “If Omicron isn’t a big problem, we’ll be fine. If it’s a big problem, the Fed will come to the rescue with even more reluctance. Now are they saying they’re going to tighten because of all of these flavors and supply chain problems? Powell has it all up.” turned upside down. “

Delta and now Omicron are still hindering recovery

Then there is a problem with the rest of the market outside of technology which has started a slow decline.

Even before omicron, Europe and Asia had to contend with new rounds of delta eruptions that hampered movement and lowered stocks.

For example, stocks in Hong Kong are at 52-week lows. Korea is also at a 52-week low. Japan’s Nikkei is sideways year round.

European markets have been on a downward trend since the recent delta breakouts a few weeks ago.

European Markets (since Nov. 18)

  • STOXX Europe 600 down 7%
  • Spain down 7%
  • Germany down by 6%
  • France down 6%

Here in the US, even before Omicron, investors sold cyclical stocks like energy and industrials due to renewed Covid worries while saving on technology.

Markets (since November 24th)

  • Technology down 1%
  • Industries down 5%
  • Energy reduced by 5%
  • Banks lose 7%

Many big names hit their yearly highs months ago and were in slow motion declines.

Dow executives (% of 52-week high)

  • Boeing 29%
  • 29%
  • Dow Inc. 23%
  • Caterpillar 23%
  • American Express 19%
  • MMM 18%
  • Johnson & Johnson 13%

Still a fluid situation

On Powell’s U-turn on the “transitory” nature of inflation, Tony Dwyer, Canaccord Genuity’s chief marketing strategist, told CNBC that the whole supply chain problem is still very fluid and that Powell could just as easily change his tone. “He basically just did one flip-flop in the last month, so who says that can’t happen again next year?” said Dwyer.

What do you do with the technology in the meantime? For a preview, Maley points to 2020. “Prices started rising in late summer and by the end of September the technology was 15% below its highs,” he said. “And that was much cheaper in one market than it is now.”

It depends on where you stand on longer-term rates.

“When rates are really going up, technology stocks are difficult to buy,” said Maley. “If you believe the phrase ‘don’t fight the Fed’ and understand that we are in an expensive market, it means you are taking some profits.”

Maley has no opinion on how much interest rates might be, but notes that “if a price-insensitive buyer like the Federal Reserve leaves the bond market sooner than expected, it should mean lower prices and higher yields.”