The Summer They Poked the Bear...And Powell

Equity--an especially growth stock--bulls have certainly felt their oats this summer, cocksure that Jay Powell simply does not have the gumption to adequately fight inflation and, therefore, their beloved growth stocks would resume their prior bull runs from last decade and then after March 2020. 

With Powell scheduled to speak this Friday morning out in Wyoming for the annual Fed Jackson Hole end of summer monetary retreat, he knows by now that the pressure is mounting for him to push back more forcefully on his skeptics. The New York Post ran an article in recent weeks noting that traders on large desks were calling him "Blinky" due to his reputation for blinking in the face of stock market adversity and going easy. 

But this time truly does differ from late-2018 and even March 2020. In both of those cases, markets were legitimately diving, acting unhinged with a soaring VIX. And in both of those cases, inflation was not historically high and threatening to remain sticky high amid major commodity supply-driven issues, as is the case now. 

Put another way, Powell has a complacent market calling him out for all of the world to see this time around with inflation that at least two generations have not had to negotiate. With the S&P 500 still above 4000 despite the recent weakness, Powell has ample cover to come out swinging at Jackson Hole on Friday with a sharply hawkish tone. You will note each and every single time this year that Powell has appeared dovish and markets rallied, another Fed speaker would immediately come out to balance out his comments with a hawkish bent.

While some may argue that this is being done on purpose, I vehemently disagree--It takes time for a Fed Chair to come around to a new regime. And I suspect Powell is in the stages of doing just that.

But as the rate hikes eventually filter down into the economy and markets (see TLT daily chart, updated below, moving down with equities today as rates push higher) I think you will find that all of the dovish pivot talk amounted to pure nonsense, as were hopes for a major bottom in growth stocks. Recall that it took then-Chair Bernanke a good while before his rate cuts filtered into the economy and markets in 2008/2009, and so the inverse also holds true for Powell and hikes.