The Inertial Market Yawns at Powell’s Presser

Earlier this week, we asserted that the trends that have dominated trading are more properly thought of as inertia rather than momentum.  Broadly speaking, the concept of inertia implies that a body in motion will remain in motion unless acted upon by an external force.  In theory, an FOMC meeting could have been the type of force sufficient to reverse the forward motion of the mega-cap tech stocks that have been leading the recent market advance.  For about a half an hour that was the case.  But a congenitally conciliatory Chair was an insufficient force to put a lid on AI enthusiasm.

It is true that we had a fairly sharp intraday reversal, though it was brief.  We went from roughly +0.5% on the S&P 500 (SPX) to down by a similar amount in the immediate aftermath of the FOMC statement.  But once we stabilized at lower levels, traders seized upon the opportunity to buy the dip, particularly in Nvidia (NDVA) and Apple (AAPL).  SPX closed marginally higher, with NVDA’s rise fully accounting for the gains.

Keeping that dip in perspective, it was relatively small for a Fed Day reaction.  It also meant that at their worst, SPX was still up 1% for the week, and the NASDAQ 100 (NDX) was still up 2%.  And the week was only about half over at that point.

Yesterday, as usual, we wondered whether “Goldilocks Powell” would make an appearance at the press conference, undermining a hawkishly-worded statement.  It seemed as though the Chair tried, but that Powell can’t help his Goldilocks tendencies.  It occurs to me now that the Jackson Hole speech was given directly into the camera while standing on the prairie.  In a room full of reporters — some adversarial, some fawning, but all respectful – his nature is to answer with respect.  That blunts any intended negative messaging.

“It’s not what you say, it’s what people hear,” is the professional mantra of a friend from college who has based a lucrative career on that mantra.  Chair Powell may want to take that phrase to heart.  Stocks jumped when he clearly stated that the July meeting would be “live.”  He likely intended that to mean that hikes would be back on the table.  A hop, skip, and a jump, if you will.  What the market heard instead was “we have a chance that we’re done.” 

Fed Funds futures traders heard a more sobering message from the Chair.  They are no longer anticipating a rate cut by the end of the year – finally – though their peak rate is below the new dot plot median of 5.6%.  Also, the recent enthusiasm for the Russell 2000 (RTY) dampened, with that index falling 1% on the day.   None of the messaging was particularly favorable for the small cap, economically sensitive stocks that comprise that index.  That rally now seems more clearly to be about traders’ search for the next pop rather than true rotation.

We’ve noted before that much of the move resulting from an FOMC meeting occurs on the following day.  As I write this, about 30 minutes into today’s session, investors have decided that there was an insufficient external force to upend the prevailing trends.  NVDA is lower, but AAPL and Microsoft (MSFT) have picked up the AI baton.  Barring a major shift in investor sentiment during the course of the day, the inertial market remains in place.