No pause, no pivot, says the Fed

@THEMARKET

It should have come as no surprise, but it did. Investors were poised for a slightly less hawkish Jerome Powell but were once again disappointed by the Federal Reserve Bank chairman. Chairman Powell and his Federal Open Market Committee's decision to maintain a course of rising interest rates for longer punctured this most recent bear market rally. The three major indexes dropped more than 2 percent and continued to fall for the remainder of the week.

There was nothing new in the committee's statement, nor in Powell's remarks afterward in the Q&A session. To some observers, he seemed even more hawkish than usual. Sure, he conceded that at some point, the Fed might pause in their tightening but not yet, and a pause would not mean a pivot toward a more dovish stance anyway.

How many times will the Fed have to reiterate its stance before the markets get it? If there is money to be made in promising hope without reason, traders will continue to suck investors into these bear market rallies. However, there may be other more interesting areas that an investor might want to consider.

For example, those who have been hiding in cash, or those who may be losing their shirts invested in equities, may want to consider purchasing some U.S. Treasuries. One-through-five-year notes are yielding between 4.87 percent and 4.44 percent.

Granted, that is only giving you about half the present inflation rate, but even the Fed is expecting the inflation rate will come down over the next 12 months. In the meantime, you are at least earning something, instead of losing more money in the stock market.

Another suggestion might be to consider Series I Bonds, which are U.S. savings bonds that protect you from inflation. You earn both a fixed rate of interest and a rate that changes with Twice a year, however, the government resets the inflation rate for the next six months. Nov. 1, for example, was the last day you could have purchased an I Bond that was giving you more than 9 percent. That rate has since dropped to 6.89 percent for the next six months and will likely see a comparable drop six months hence. You must keep I Bonds for one year after purchase.

Now that doesn't mean you should go out and sell everything and pile the money into U.S. Treasuries. But investing some money in short-term debt might be a smart investment. I would at least ask your investment adviser about the possibility if you haven't done so already.

So, is this latest rally over? Not necessarily, but if the markets are going to continue to move up, at least for another week or two, it will have to be on something other than Fed policy. About the only bullish event in the U.S. that I could see that would trigger another rebound would be the results of next week's mid-term elections.

As of today, Republicans are expected to take back the U.S. House, and maybe the Senate. If so, a two-year period of paralysis will likely descend again on our government. Historically, financial markets have liked that kind of political standstill. No new major legislation would likely be passed. That means taxes will not rise, nor would spending increase, except on the margin. Predictability is the grease that oils the wheel of market gains, all things being equal.

Rumors that China may be considering lifting its Zero-COVID policy propelled the markets higher on Friday. If this rumor, which is based on a news story from Bloomberg News, turns out to be true, that could give a major growth boost to world economies.

China's economy has been disrupted by its frequent openings and closings of cities, factories, ports, etc. based on virus outbreaks. A change in policy could boost demand, imports, exports and impact many companies worldwide. However, even if the rumor is true, a full reopening of the Chinese economy wouldn't happen until March 2023.

Could that outcome trigger a rally in the markets for a couple of weeks? Probably, and we might be able to put together a bullish scenario that could see my target of 4,000-4,100 met on the S&P 500 Index achieved.

I warned investors that this relief rally would be different and so far, it has been - lots of ups and downs. In the meantime, equities are still at the mercy of interest rates, the strong U.S. dollar, and geopolitical events.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401, or email him at [email protected].

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