During bull markets, it is quite easy for market participants to embrace the old marketing saying, "Don't fight the Fed." That worked for many years following the 2008-2009 bear market. However, in bear markets, there is a greater tendency for market participants to battle a hawkish Fed. A big part of this reaction is fatigue with the poor market action and hope that the Fed is about to pivot and curtail its pressure on market conditions.
A consistent theme this year has been that the market anticipants a slightly less hawkish Fed or some friendly economic news but then is crushed when that doesn't materialize. The market runs up even though a parade of Fed members continues to talk about how more rate hikes are coming. Then there comes a point when Fed Chairman Jerome Powell sends the message home once again, and there is a sharp decline.
This pattern of action has been developing once again as we await a speech by Powell on Wednesday afternoon. The market has been running up since early October and had an additional boost last week due to Thanksgiving seasonality. There has been a bullish narrative that positive seasonality into the end of the year, combined with poor positioning, would keep this positive trend going.
Market players have been anxious to embrace the idea that inflation is cooling and the Fed is about to pivot, but Fed members are not being cooperative. While they may hike rates by "only" one-half percentage point in December, there is no indication at all that the battle over inflation is won and that a recession can be avoided.
The Fed remains very hawkish, and the market's inclination to fight it has been a consistent mistake this year. The great likelihood is that Powell will make the Fed's hawkish message quite obvious once again on Wednesday, which is why the market had a nervous reaction on Monday.
I'm looking for choppy action on Tuesday as market players position for the Powell comments. This situation will be similar to a Fed interest rate decision, and there is potential for a big move on the news.
Market participants are tired of the poor price action and are so anxious for relief that they are unrealistic about the Fed's level of hawkishness. Keep that in mind as we prepare for another reminder that we are a long way from victory over inflation.