KMPB - I Predicted A Return To .50% Rate Rises In January Here's What Comes Next

2023-03-08 15:55:18 ET

Summary

• Powell indicated that he's ready to accelerate the pace of rate rises on the back of surprisingly strong inflation numbers from last week during his testimony before Congress.
• Honestly, Powell did not explicitly say he would go to .50%, but it was generally accepted that he meant .50% is on the table.
• Powell could increase before the next FOMC meeting, then he can keep with .25% for March and another rise in April. Then, if necessary, he could still go with .50%.
• Finally, I'm seeing such universal bearishness that I'm starting to look for a counter argument. I suspect that after March 22, we could have another bear market rally.

I don't wish to press the notion that we are headed for a very deep recession. I don't

I'm not going to give a long-range projection. I want to counteract recency bias. If the market would be roaring to old highs would the chatter be so gloomy? Not a chance. So let's limit the scope of this analysis because this market is too psychotic and inscrutable to make projections too far ahead. Will we have a recession? Will we have a soft landing? Will inflation remain sticky? Will US productivity rise? Will more adults get back into the workforce? We all need more data.

Check out these two articles regarding the tactics available to Chairman Powell, and predicting going back to .50% raises

I examined Powell's announced rise of a .25% rate raise, and it didn't add up. Check out this article: February should bring massive sell-off , and the second: Chairman Powell's biggest decision of his career. I concluded that Powell will have to return to .50% and other forms of tightening in order to restrict what was obviously irrational exuberance. I have confessed that my timing was about three weeks too early. I'm gratified that our community Dual Mind Research stayed the course, and now we're protected on the downside. We even are getting down to specific stocks to trade for the downside. The skill of a stock picker can be used to successfully surface individual stocks from companies whose business model is under difficulty, or they lack access to financing.

Last week we got some spurious paradoxical reactions, in the form of a sharp rally. On March 6 the one day before a heavy economic schedule a thought gained currency by non-other than Mike Wilson of Morgan Stanley, the CIO who boldly predicted way before the bear market that we were about to enter one. He averred that perhaps the market is sniffing out a bear market rally. Try as I might I could not wrap my head around any bullish alternative that loft any kind of rally bear or otherwise. Going through the economic data, except for the prices paid, everything else was flashing inflation warnings last week. It was my thought at the start of the week that perhaps because the market rallied so strongly last week we would see that this week as well.

Then on Tuesday coming from Chairman Powell's testimony before the Senate, the chairman did what I thought back in January he would have no choice to do. Namely, to return to higher increments, he used a "faster pace" which was widely interpreted as .50%. In the aftermath of the Senate hearing, it was widely assumed that officials would lift the Fed's benchmark lending rate by a half percentage point at the next meeting if upcoming reports on jobs and prices show rate hikes have done little to cool the economy.

Last week in my latest article with a view toward the post-March 22 FOMC meeting I suggested creating a shopping list for tech companies. There are of course many other sectors that are underpriced and could be further pressured if the market values stocks at a lower P/E as interest rates rise. This morning I went long on calls for the [[XBI]], this is the equal-weight biotech ETF that would go up with smaller biotech stocks rising. I'm looking at [[XLI]], the industrial ETF, as well as adding to my Boeing (BA) shares, with the idea that industrial names will continue to shine as well as biotech being a proxy for overall "tech." Small biotechs are a high beta trade and could shine as we have March 22 in the rearview. As for industrial investments names like Caterpillar ( CAT ), Ingersoll Rand ( IR ), Terex ( TEX ), and even Manitowoc ( MTW ) could do very well with the infrastructure bill finally being put into the economy.

When the accepted narrative is that we are heading lower, that we are headed for recession, this gives me pause.

When everyone is leaning in one direction chances are that either the market has discounted that negative or the negative issue has "past its expiration date." So I will monitor the indicators that I follow and the Dual Mind Research Community members' input, and we will be ready to change direction when called for.

Other sectors that can work? Healthcare seems to have fallen. The health ETF [[XLV]] is down about 11% to 12% so there are probably plenty of great names from large caps like UnitedHealth (UNH) -15%, or Eli Lilly (LLY), a name that I'm looking to build a bigger position in, is down about 18%.

I'm also looking for companies that should benefit from higher interest rates. This week I focused on building a larger long-term position in insurance. All kinds of insurance services will greatly benefit from short-term risk-free rates of 4% and 5% in the form of US treasuries. So I opened new positions in Goosehead Insurance ( GSHD ), Chubb ( CB ), and Kemper ( KMPR ). It's a fairly new position that I started the week before. I added to Equitable ( EQH ), and MetLife ( MET ) which were long-time investments. I think this is a great low-risk way to benefit from higher short-term interest rates. There will be areas to invest in from the long side. Right now I'm limiting my long side to equity investments in my long-term accounts. I'm partial to biotech, medtech, and pharma equities as I wrote about earlier in the paragraph.

OK, you said you're going to talk about what happens next.

Right now, I think that unless the higher frequency data was revealed today namely that the ADPs jobs report had higher than expected job creation and actually updated their January number higher. We also saw the JOLTS report revealed as Chairman Powell started his testimony to the house at 10 a.m. We had a hotter JOLTS number of 10.8M higher than the estimate of 10.6M. JOLTS stands for Job Openings and Labor Turnover Survey. JOLTS is a monthly report by the Bureau of Labor Statistics of the U.S. Department of Labor counting job vacancies and separations, including the number of workers voluntarily quitting employment. So this number is very important to Powell as he has targeted job openings in excess of available workers. Right now I believe that we have more than two jobs for anyone who is available to work. What I'm getting at is that I'm leaning toward some pretty strong employment numbers for this Friday. If that is the case the news will pressure stocks. The February employment number even if it comes back at half of January's 500K jobs, 250K is still way too high. Now every day that goes by we get closer to the FOMC meeting on March 22. If Friday comes out strong the talk of the Fed going back to .50% will get louder and the lack of visibility of what the raise would be will pressure the market.

So what should one do to have some foresight to what is happening in the market?

Good question. The VIX is not working, and the dollar seems to have lost its influence. At this point the best indicator is the 2-Year Bond reaching beyond 5%, the 10-Y is the laggard. My presumption is that the 2-Year will push up the 10-Year. If the January Jobs number comes in cooler something like 200K to 215K, maybe an unemployment percentage that ticks up to 3.5%. If that happens interest rates will go in the other direction and stocks will restart another bear market rally. Bear in mind the linkage of the jobs number is related to interest rates is that it will determine the direction of interest rates and that will push the market into the appropriate direction.

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