Seven months ago, we became indoctrinated in the notion that we would have a recession. Why? Because, with the last Fed rate hike, the bond market became inverted with shorter rates higher than longer rates. That's a signal, a well-established signal that predicts a recession and to ignore it would be to lack in rigor and be courting a disaster if you stayed an optimist, if you stayed a bull.
I was flummoxed by this, candidly, because I figured that Jay Powell can read the same stories I can read and he would know that not only was the idea of continual rate hikes just plain pernicious but the last rate hike was downright ill-advised.
A rational, thinking person, the Jay Powell I know, would stop a recession if he had to and perhaps the easiest way to stop one is to stop the prediction machine: roll back the last rate hike and get the inversion stopped in its tracks.
But those who sold stocks because of the inversion weren't buying it. Not only did they tell you to sell stocks, and sell them endlessly, but they tended to be predicting that we would still have several more rate hikes this year.
I think the "inverters" are now on the run and they don't know what would keep stocks down now the most effectively, something they need desperately because they have fallen so far behind the averages. They may have very large investors committed to them, so perhaps they could be fine. Perhaps they are so rich themselves it doesn't matter.
But what I don't like is that they are never, ever going to say out loud, "I thought that an inversion meant that you should sell stocks because a recession was coming and now I don't know what to do because Powell saw it himself and decided to roll back short rates ending the inversion."
They will never say it. And they will never be called out on it because they simply aren't, individually, important enough to chastise, and if you do chastise them they can always make your life more difficult so it isn't all that worth it.
But what will drive them to disparage the market next? What are they scaring you about now?
Specifically disappointing earnings.
They see weakness and they are telling you that stocks will go down when you get that weakness.
There are two problems with that line of thinking, however. First, if you are selling a cyclical, you may have to deal with lower short rates, which have, historically, been good for these kinds of stocks. Investors will look right through the earnings valley because of a flexible Fed.
Second is the Micron Technology (MU) issue. Micron's stock had been rallying into earnings because people were hoping management would be positive about the near-term. They weren't. They were positive about the long-term. What happened? The stock rallied from $32 to $44. Keep in mind this rally occurred without any tangible signal from the Chinese that they are going to buy more of our semiconductors.
Do I think all of the earnings this week will be strong? Of course not. Do I think the reactions to weak earnings will be negative? That I am not so sure about. The bulls now have the Fed and those looking out further than the near-term on their sides.
Those are powerful opponents to the bears, perhaps too strong to overcome.