Powell Left the Market a Bitter Pill, Let’s Check the Ingredients

Fed Chair Jerome Powell has concluded his testimony Tuesday in front of the Senate Banking Committee, giving the market a bitter pill to swallow.

The market moved lower and the Cboe Volatility Index (VIX) has moved up as Powell spoke. Leading into the testimony, Powell’s published opening statement spoke to a number of the factors and data points we’ve been discussing with you of late. Let’s look at some lines from that speech:

“The data from January on employment, consumer spending, manufacturing production, and inflation have partly reversed the softening trends that we had seen in the data just a month ago. Some of this reversal likely reflects the unseasonably warm weather in January in much of the country. Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting.”

And as we discussed in our comments from earlier this morning, Powell did stick to the “data dependent” script:

“We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.”

And while Powell signaled that, yes, interest rates will likely move to higher levels than were previously expected, little clarity was given on what that means for its next policy meeting.

“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

Again no surprise, especially given the data ahead, including the February jobs report, and both the consumer and producer price indexes that we discussed on today’s Daily Rundown. Action Alerts PLUS lead portfolio manager Chris Versace pointed to this as more than likely keeping the market volatile as it trades day to day and data point to data point. While we and the market would like a clear picture in the data, odds are we could get some mixed signals, something that would further confound the market, potentially increasing its volatility. In the Rundown, we revisited our game plan, which remains walking a cautious path as the market runs the risk of resetting expectations yet again for Fed policy actions, the speed of the economy, and earnings expectations for 2023.

As this rethinking unfolds, should it weigh further on the market, it will give us a possible opportunity to exit the rest of our “Four” rated McCormick & Co. (MKC) position as well as use some cash on hand to pick up shares in existing positions at better prices and potentially start new ones in some of the stocks we’ve been closely watching.