The date the bull market begins

Fed forecasts are just noise…what really matters for your portfolio…evidence of slowing demand and falling inflation…when to look for a market recovery

A rebound is coming.

It doesn’t feel like it on days like today when the markets are a sea of ​​red, but it does happen – and perhaps a lot more than many investors realize.

To understand why, let’s go back to Wednesday’s big “nothing-burger”.

That’s how our hypergrowth expert Luke Lango described the outcome of the Fed’s September meeting on Wednesday.

From Luke’s Innovation Investor Daily notes:

We don’t really understand why everyone is reacting so harshly to the Fed, its economic projections or its actions.

But here are our two cents: It doesn’t really matter.

In our Wednesday Digest, we took a bearish tone, explaining why the Fed might want to crash the market and the economy. Today, let’s balance that with a bullish outlook from Luke.

We’ll find out what’s most important to the direction of the market right now, and why we should be encouraged, not battened down.

In fact, if Luke is right, his favorite segment of the market – top-tier growth stocks – will be up 50% and more by the end of the year.

So, let’s get rid of the recent market volatility and focus on the growing light at the end of the tunnel.

How seriously should we take the Fed and its latest forecasts?

For the new Digest readers, Luke specializes in finding cutting-edge technology innovators who are changing our world – and transforming portfolio returns in the process.

On that note, since its June low, the tech-heavy Nasdaq has risen 23%, only to give up nearly all of those gains, now settled 2% higher than the June low by the time I write. Meanwhile, during the same period, Luke Top 10 purchases in his Innovation Investor portfolio posted an average gain of almost 20% – despite strong selling pressure since mid-August.

Returning to Wednesday’s news, let’s resume with Luke explaining why the market reacted so badly to the outcome of the Fed meeting:

The stock market’s initial reaction to the Fed’s rate hike announcement was that its forecasts for future rate hikes and inflation have risen significantly since the last meeting and are well above market expectations.

Luke explains that the Fed’s forecasts for inflation in 2022 and 2023 are up 20 basis points each from their forecasts from the June meeting.

Similarly, core inflation forecasts for 2022 and 2023 have increased by 20 and 40 basis points respectively.

Finally, the forecast for the fed funds rate in 2022 exploded by 100 basis points, while the forecast for 2023 jumped by 80 basis points to 4.6%. On Wednesday, Wall Street had pegged peak rates of around 4%, so the 4.6% forecast was a record moment.

All in all, these are very bearish forecasts and the market reacts badly. But Luke has a simple answer…

Don’t expect these predictions to come true.

back to sound Daily notes:

Overall, this was a very bearish set of projections from the Fed. But ultimately, they don’t mean much.

Remember when the Fed said inflation wouldn’t be a problem a year ago? Remember when he announced he would only raise rates a few times earlier this year?

Central bank projections have always been as imprecise as possible, so there’s not a lot of credibility there. But more importantly, his actions are reactionary – they are not proactive.

In the model of the US economy, Fed actions are an exit. Inflation is the input. You don’t predict outcomes by looking at outputs. You predict outcomes by looking at inputs, because they determine outputs.

[Wednesday’s market action] was the proof par excellence!

At Luke’s point, following the Fed’s announcement, stocks tumbled nearly 1% on hawkish projections.

But then they rebounded from those lows to hit 1.2% after Federal Reserve Chairman Jerome Powell said the Fed’s projections depended on the data.

They then crashed again, ending the day down 1.7% after Powell-induced jitters returned.

Back to Luke:

Come on now – if that doesn’t tell you that we shouldn’t react to the Fed and its projections, then I don’t know what is. All it does is react to inflation.

If inflation remains high, the Fed will remain aggressive. If inflation cools, it will fall with rate hikes.

And so, we come full circle. It all comes down to inflation.

Inflation – not the Fed – is what matters today. If it cools, all the problems in the stock market will be solved and our growth stocks will soar.

So why is Luke convinced that inflation is falling?

For starters, there are major signs of slowing demand.

We recently received two pieces of data that put this dynamic in the spotlight. The first concerns the downward revisions to the Atlanta Fed’s GDPNow forecast.

Here’s Luke with more:

For a time, it looked like the US economy would rebound in the third quarter after two straight quarters of negative GDP growth. In early August, GDPNow’s forecast for third-quarter GDP growth was 2.5%.

However, this forecast has steadily declined since.

At the beginning of September, it fell below the 2% mark. Last week, it fell below 1%. [On Tuesday]it fell to 0.3%.

The third-quarter GDP advance estimate is released on Oct. 27, so there is still more than a month for new data to make or break the reading. However, given the current directional trend, a third consecutive quarter of negative GDP could be in the cards.

Back to Luke on what that would mean:

Whether [Q3 GDP is negative]there will be no doubt: the US economy is in recession.

Such confirmation will likely push the Fed toward more accommodative policy as the year progresses.

Regarding the second piece of data showing a slowdown in demand, Luke highlights shipping

Inbound containers at major US ports like Long Beach, Savannah and Norfolk are considered a leading indicator of economic activity as they are a coincident indicator of consumer demand.

For those less familiar, a “coincident” indicator simply means that changes are occurring simultaneously (or nearly simultaneously) with another variable – in this case, consumer demand.

Back to Luke with more details:

Those numbers were skyrocketing in 2021. Now they’re plummeting, and the crash shows no signs of letting up.

This is another data point underscoring that the US economy is slowing, perhaps even faster than the overall GDP numbers suggest.

Therefore, we believe the odds of a dovish pivot from the Fed are much higher than what the market is expecting today.

Finally, what about inflation itself? Are there any positive signs that this is decreasing significantly?

In answering this, Luke points to a recent research note from Capital Economics. Business economists believe a massive disinflationary wave is building in the US economy.

Here is Luke with these details:

The big points? Oil prices are collapsing. Metal prices are collapsing. Food prices are collapsing. Energy and transportation costs are falling. And supply chains are rapidly normalizing.

Of particular interest, the company’s proprietary commodity shortage indicator – which has always been a very strong leading indicator of underlying inflation – plunged.

If this very strong correlation between Capital Economics’ commodity shortage indicator and underlying inflation rates persists, underlying inflation could fall back to 2% before the end of this year.

When to look for stocks to start rallying

Following Luke’s line of thinking, stocks will rally on evidence of weakening inflation. So when will we get the next big inflation update?

Here’s Luke with the answer, and also the final word:

The next major inflation data to be recorded will be October 13 with the September CPI. Anything reported that day will be far bigger than what the Fed said [on Wednesday].

We believe this report will be very weak and therefore we believe that regardless of how the stock market develops over the next few weeks, it could be setting itself up for a massive rally in October.

So forget the Fed. Focus on inflation. This will allow you to separate the noise from the signal in this market and make money despite the current bear market.

Have a good evening,

Jeff Remsburg

Comments are closed.