The market celebrated a dovish Federal Reserve Chairman Jerome Powell on Wednesday, but skepticism is running high and the iShares 20+ Year Treasury Bond ETF (TLT) is practically calling him a liar as it continues to sell off here on Thursday morning.
Three months ago, the Fed expected GDP growth of 4.2%, unemployment of 5% by the end of the year and inflation under 2% until 2023. It now expects GDP growth of 6.5%, unemployment of 4.5% and "transitory" inflation hitting 2.2%.
Despite this impressive growth and a spike in inflation, the Fed doesn't project that interest rates will be raised until at least 2023.
It seems like the best of both worlds, and many market players are questioning how this could occur. Chairman Powell's explanation is that this is just a short-term spurt in growth as the market returns to normal. This level of growth cannot be sustained, but there will be some short-term overshoot in inflation, though that won't persist.
Powell used the metaphor of going out to dinner to explain his thinking. Many people will be going out to dinner again like they used to and eventually, that will return to normal. However, "You can only go out to dinner once per night," Powell said, and therefore, growth will slow.
That is the message out of the Fed meeting Wednesday, but the issue now is to what degree the market embraces this thinking. Bonds are under severe pressure again, and many pundits are expressing their contempt for this theory.
Actual after-the-close Wednesday night was quite upbeat, but the indices are turning down here on Thursday morning as the rotation out of technology, growth stocks and the Nasdaq 100 is picking up again. The last few times we have had trading as we did into the close Wednesday night, the action cooled quickly as inflation fears and rotation hit again.
The dilemma for market players is that this debate over the Fed and interest rates tends to create correlated action, which undermines individual stock picking. The inflation issue and rotation render the merits of individual stocks irrelevant and can be quite frustrating as our good picks just don't attract the buying power needed to produce positive momentum.
Early indications are that we are right back to the action that occurred before Powell's press conference. We will see if some buying support starts to kick in. It would be best if there was more focus on separating those stocks that will not be unduly impacted by higher interest rates, but the market isn't doing that at this point.
All eyes are on bond yields and that is causing some problems.