"Wait and see. And watch."
Paid subscriber analysis
Those were the most frequently spoken words of J. Powell on Wednesday’s FOMC press conference. As we anticipated the day before, and in our Saturday FOMC overview section, the FOMC meeting was a non-event.
The Fed did not cut rates, their approach is still “wait and see”, specifically concerning tariffs and the impact on the economy. Pretty much what we expected last week:
The most likely scenario is “kick the can down the road”. No cuts (>96% prob), no change to Powell’s policy stance (which can now be called “wait and see”), occasional mentioning of policy uncertainty, and that they are carefully assessing the potential impact of tariffs on prices. Also, mentioning that labor markets remain strong is highly expected.
In other words, it is unlikely this event will trigger a major market reaction, especially not to the downside if Powell refrains from any strong language.
Exactly what happened. The initial statement, when it came out at 2pm, half an hour before Powell’s presser, did signal some cause for concern due to a change in language, specifically adding that the Committee “judges that the risks of higher unemployment and higher inflation have risen”:
But Powell’s press conference was certainly more dovish than this statement, and the market reaction was clear, SPX went from -0.5% to +0.4%, NASDAQ went from -1% to +0.4%. To be fair, that final push towards a green close was driven by the announcement from the administration about the repeal of the AI diffusion rule, something that was objected to by NVDA during the Biden administration, thus triggering a strong reaction from NVDA and the rest of the tech sector. Then overnight we got the info that the trade deal with the UK has been signed and Thu opened gap-up, only to see Trump tweet once again: “better go out and buy stocks”. SPX soared to 1.5% for the day, before reversing half of those gains towards the end of day, after news that Chinese tariffs will get cut down from 145% to 50% (which is clearly still too high).
We are therefore where we were the past few weeks: any new information about a trade deal or some positive announcement (read: social media post) from the administration is a bullish sign for markets. Or at least, that’s the narrative.
Note, however, that Trump’s posts carry a lower weight on markets and the impact lasts much less than before. We might be getting out of the whole Feb-Apr frenzy of sharp reactions to whatever the administration mentions in the press. Fatigue?
Is the bull run justified?
Because of this, many are saying this entire bull run is irrational and that markets are not pricing in the full extent of the damages the tariffs will impose on the US (and global) economy. The narrative seems to be that news from the administration is not reassuring at all, and there is no rational reason why markets are back above 5,650 (back to before Liberation day levels).
But that’s the wrong way to think about markets. When I started trading this is exactly how I used to rationalize things: bad news (or lack of sustainably good news) must mean that markets need to keep going down. Why aren’t they? Markets must be irrational! I’m right in interpreting macro, everyone else is wrong! That’s lazy thinking.
You gotta remember, markets do their own thing every once in a while. The entire mid-April to early-May up move (post April OpEx) was driven by supportive flows and a considerable amount of short squeezes. That was then followed by one technical breakout after another: 5,200 => 5,450 => 5,600. Many traders and algos trade around key levels, follow options flows (e.g. CTAs, vol targeting funds, and other systematic positioning funds) and their reactions are often automatic and not necessarily linked to a piece of news; even if we see some correlation between hints of a trade deal and positive flows. All in all, this is not irrational behavior. It’s normal. Only a strong catalyst to the downside - like a very bad inflation/jobs report, or admission of no tariff deals - can bring bears back in control and extend the April sell-offs even further down. When might this happen?
Two weeks ago, when SPX was at 5,500, we talked about the continuation of the bullish momentum, into 5,600, and eventually 5,700 - and then if SPX breaks and confirms above 5,700 that it is likely to go even higher (5,900 or more). We have failed to break 5,700, but touched it twice now.
Will we break through in the next two weeks, or will we get the next correction?
This is the key question we cover in today’s paid section.