DFEV - Fed Chair Jerome Powell Goes Full Circle
2023-12-20 04:57:00 ET
Summary
- Some FOMC members saw two cuts, some saw four – based on dot plots – so three, more or less, marks the middle.
- Emerging markets have lagged developed markets quite dramatically as the U.S. dollar has rallied, along with the Fed’s monetary tightening.
- Emerging economies tend to borrow in dollars, so a stronger dollar makes it harder for them to service their debts, while higher dollar interest rates make it even harder for them to roll over debts.
It is hard to expect any meaningful market pullback when the Fed Chairman pretty much says that there will likely be several rate cuts coming in 2024. Some FOMC members saw two cuts, some saw four – based on dot plots – so three, more or less, marks the middle. I have said the stock market is overdue for a pullback, but it has not come. All we have seen since early November are single-day selloffs with marginal selling carrying though a second day, but if we are to be honest, selloffs have been one-day events.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Because of the rotation out of technology stocks into small caps, financials and industrials, value indexes like the Dow Jones Industrial index have become a little extended. Not only is the Dow at fresh all-time highs, but its RSI over 85 indicates that the index is the most overbought since the rally that began after the 2020 COVID lows. I am sure there have been some historical occasions when the RSI readings have gone a bit over 85, but there would not be many. It is rare for a major index to go above 70 in an oscillator like RSI and even rarer to go above 80. Whatever one day-wonder-like corrections we may see this week or between Christmas and the New Year, the market is more or less on autopilot, higher most of the time.
If we avoid a recession in 2024 due to unknowable lags of monetary policy that may still hit the economy, I think the better performers will be the biggest laggards of 2023, namely the small caps and financials.
And if we manage to avoid that recession, Jerome Powell will be the luckiest Fed Chairman since Arthur Burns (served 1970-78), as he was way too late to recognize the inflation problem, causing the Fed to tighten more than otherwise would have been necessary – after he left – as over-tightening is dangerous and can choke off the economy, potentially causing a recession that otherwise could have been avoided.
Ironically, the shortage of workers (with a current unemployment rate of 3.7%) and the shortage of houses after a time of near-8% mortgage rates (six weeks ago) may be the actual reasons why the U.S. economy dodges a recession. It’s hard to enter a recession when nearly everyone who wants a job is working and spending money, and home prices are strong due to the low inventory of homes on the market – as people with low fixed-rate mortgages don’t want to sell. Strong home prices support overall economic activity.
Emerging Markets are Likely to Shine in 2024
Emerging markets have lagged developed markets quite dramatically as the U.S. dollar has rallied, along with the Fed’s monetary tightening. As the dollar sells off, emerging markets should do very well as they are closely correlated (inversely) with the dollar. Why this inverse correlation?
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Emerging economies tend to borrow in dollars, so a stronger dollar makes it harder for them to service their debts, while higher dollar interest rates make it even harder for them to roll over debts. When such a vicious cycle winds down, as it seems to have just ended, emerging markets can dramatically outperform.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Fed Chair Jerome Powell Goes Full Circle