What Will Powell Say Now?

By Alex Eule Tuesday, January 31

A Game of Chicken. Stocks just wrapped up a banner month. After a 1.7% rally Tuesday, the Nasdaq Composite finished January up 10.7%, its best start to the year since 2001. The S&P 500 and Dow Jones Industrial Average each gained more than 1% on the day, bringing their January gains to 6.2% and 2.8%, respectively. 

February will provide an immediate test for stocks, with the Federal Reserve set to announce its next interest-rate decision tomorrow. Fed Chairman Jerome Powell will also face questions from reporters about the state of the economy and the Fed's plans for future rate increases. Every sentence will be parsed, with the potential to send stocks sharply higher -- or lower. 

The futures market is unanimous in counting on one more quarter-point rate increase tomorrow.

Things get more complicated from there, and investors are playing an expensive game of chicken with the Fed. For months, Powell has repeatedly said that he is serious about holding inflation in check, even if it means pain for stocks and the economy. There's no reason to think that message will change tomorrow. The market, though, continues to bet that the Fed will eventually blink and pause -- or even reverse -- its rate hikes. 

"Crafting the right message is going to grow increasingly challenging from here," RBC Chief U.S. Economist Tom Porcelli wrote of Powell today. "The cycle is nearly over but messaging that right now is tricky as it relates to financial conditions that he does not want to see ease too much."

The January surge in risky growth assets suggests financial conditions have already eased considerably, and that's certainly making Powell uncomfortable headed into tomorrow. 

Here's a sampling of January's crazy moves: 

·        Carvana: +115%

·        C3.ai: +77%

·        Peloton Interactive: +63%

·        Tesla: +41%

·        Bitcoin: +40%

·        ARK Innovation ETF: +28%

Each of those assets had a terrible 2022. The Fed will go a long way in determining the rest of their 2023. 

DJIA: +1.09% to 34,086.04
S&P 500: +1.46% to 4,076.60
Nasdaq: +1.67%  to 11,584.55

The Hot Stock: A.O. Smith +13.7%
The Biggest Loser: Phillips 66 -5.8% 

Best Sector: Consumer Discretionary +2.3%
Worst Sector: Utilities +0.7%