Not So Scary After All
After a series of meetings and press conferences where the Fed seemed intent on stifling any optimism in the market to demonstrate its commitment to crushing inflation, the Fed took a breath on Wednesday. Not officially – in fact, the Fed raised the Fed Funds rate 0.25% to 4.50-4.75% and indicated that further rate increases were likely. But in prepared remarks and in responding to questions from the press, Chair Powell had to acknowledge mounting evidence that Fed policy is working, and inflation is coming under control – in fact, he even used the term disinflation several times to describe the environment in the goods and housing spaces. Further, he noted that a “soft landing” may still be possible – i.e., we are in uncharted territory post-COVID and employment may not need to pull back as much as in previous tightening cycles. Some of the hawks were still notably evident, however, as he reiterated that the Fed’s job was not yet accomplished, and they must err on the side of doing “too much” rather than “not enough”.
But it was a balanced take rather than another kick in the teeth and the markets recognized it and ran with it.
After being down -0.63% pre-presser, the NASDAQ (the poster child for animal spirits) soared 2.0% by end of day. You could hear the audible groans from the “smart money” talking heads, positioned meaningfully net short since the beginning of the year, who wanted the Fed to pull out its dog whistle and take the markets back to revisit the October lows. One afternoon does not make a trend, but that idea seems much more unlikely now.
Do not misunderstand our enthusiasm for an “all clear” signal. It is rarely that simple and many concerns remain:
- Fed policy operates with “long and variable lags,” and we are just starting to experience the consequences of 2022’s tightening;
- Overall earnings estimates are likely still too high;
- Some part of inflation is prone to be stubborn and sticky;
- The Fed could still misstep and deliver a meaningful recession; and
- “Junk” has rallied a lot in a very short period (look no further than Bitcoin, which is up 43% YTD).
……To name just a few.
Call us crazy, but we are excited to see the Fed has reached a point where it can be data-dependent again. We argued for a little humility back in November (Mark’s Musings: 11.16.22). Perhaps we will look back and see this as an inflection point, after which investors had to roll up their sleeves and work diligently to find specific, security-level investments with attractive characteristics (they are still out there!) rather than relying on either easy money or unrelenting hawkishness to formulate a one-way macro-based investment strategy.
Active managers and stock-pickers of the world rejoice!
We like such a world — a lot. The Cost of capital matters again and is proving meaningful to investment decisions – eventually separating the winners from the losers and exposing the posers (i.e., SBF).
We look forward to employing our unique set of skills across multiple traditional and alternative asset classes to continue to meet the objectives of our clients in a more complex and demanding world.
Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
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