There is an old Wall Street saying: “the stock market STOPS panicking when central banks START to panic.” The Fed (and other banks) sure seem to be panicking in recent months.
We believe that the Fed has just made a big mistake. The 75bps increase was already priced in, but Powell seems to indicate that a crash landing is unavoidable.
The approach he should have taken was to acknowledge that some economic and inflation indicators are showing weakness, and maybe a near-term pause would be in the cards.
Most of the forward-looking inflation indicators we look at are falling, and some quite rapidly.
Hiking aggressively while the economy is slowing is rare. Typically, monetary policy becomes tighter when the economy is expanding.
Most of what you will read will be negative and bearish. Those suggesting that you buy are few and far between. However, the time to be bearish was when CPI doubled, the economy was booming, and the Fed was still buying bonds while holding rates at 0%; these were signals to de-risk.
Astoria believes we are close to the end of this tightening cycle. Will inflation stay structurally higher and for longer? Sure.
We believe we are 75% thru this market downturn. When the Fed panics, usually, we’re close to the end. Because of Powell’s tone at the press conference, we see a scenario where the market may bottom around 3200 on the SPX.
Just remember, as markets correct, valuations should improve and forward returns become more attractive. It makes sense to be incrementally more bullish as the market goes lower. Investors and market pundits seem to be doing the opposite.
Astoria prefers dividend payers, value over growth, and defensive quality stocks. We are finally warming up to bonds after years of shunning the asset class. We are buying laddered US treasuries, IG credit, and munis – all short-dated paper.
We’ll always include alternatives and be diversified across factors because that is, after all, Astoria’s True North.
You can view the fact sheets of our strategies on the Strategies of our site.