by Jason Bodner

January 19, 2022

When the Fed speaks, the world listens.

Or, should I say, when the Fed speaks, everyone overreacts?

The Chairman of the Federal Reserve holds the most powerful seat in the world. Sure, the President commands more attention in some matters, but no one impacts asset prices more than the Fed chair.

Sometimes it just takes two words.

During the dot-com bubble, in a December 5, 1996 speech, Fed chair Alan Greenspan used the phrase, “irrational exuberance” and the Tokyo market slid sharply, closing down 3% from its high. Global stocks sank across the board, thinking that the Fed chair was saying that markets could be overvalued.

Last week, notes from the December Federal Reserve Open Market Committee meeting were released. Their “hawkish” language indicated that money might tighten soon. The phrase “sooner than anticipated” caused a big skid for tech stocks, since those words would have big implications for our financial future.

How bad is it? Or is it even bad at all? Do those words really mean anything at all for stocks?

Let’s start by looking back. Two years ago, all stocks seemed good – the good, the bad, and most in between. The party seemed like it wouldn’t end; investing seemed easy.

Though unpopular, I called that market “overbought” in late January 2020. Naturally, I had no idea that a pandemic would soon grip us and crush stocks. The data just that said the buying wouldn’t last.

But the crash didn’t last long, either. The data soon screamed “oversold,” and I predicted a market low for Friday, March 20, 2020. The bottom happened just one trading day later – Monday, March 23. Stocks then soared, up 20% in three days, eventually hitting new highs. Huge money flows and stimulus checks fueled the rally. The Fed’s aim was to flood us with liquidity, calm nerves, and lubricate commerce. Rates dropped to zero (negative in some places), and the spigot of government funds was on full blast.

Naturally, all good things come to an end, but no one ever wants them to. Now the Fed says easy money must at least slow and growth stocks have been hit hard. But looking even further back to similar big reactions to potential Fed policy changes might hint at what’s in store for us going forward.

In 2013, another Fed chair caused turmoil. This time, Ben Bernanke just said that, at some point in the future, the Fed would slow bond purchases. This caused an immediate panic, because in the Great Financial Crisis of 2008, the Fed bailed us out by buying bonds. This injected desperately needed liquidity into an ailing system. Five years later, Bernanke was signaling that was just going to slow.

This market over-reaction was soon dubbed the Taper Tantrum.

Investors freaked and sold bonds, shocking the market. Stocks followed the next spring, in April 2014; “momentum stocks” sold off hard. Many of my recommendations and personal holdings were suddenly under immense pressure. It was ugly and very uncomfortable. But those losers are today’s big winners.

This sounds familiar, doesn’t it?

Today, Fed chair Jerome Powell is faced with a dilemma similar to Bernanke’s “taper tantrum” in 2013. He must fight inflation and hint at tighter money policy… but not too much to tank the economy.

Talk about a stressful job!

The tech-heavy Nasdaq started slipping in September, then it rallied. But since November, it hasn’t really gone anywhere. Under the surface, tech selling has been huge for our modern-day “momentum stocks.” Below we see the S&P tech sector ETF against all buys and sells in that sector according to MAPsignals.com. Notice the clear increase in selling since November:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The big boys have been holding up. In fact, they have been holding up the entire market because of their massive size. But younger growth engines (perhaps the leaders of tomorrow) have been getting smoked.

Look below at all the buying and selling, according to MAPsignals.com. We see huge tech selling. And that money is rotating into financials and energy in a big way:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We also see that rotation playing out in a spike in ETF volumes since New Year’s:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

But why is tech suddenly getting crushed?

When the Fed winds down quantitative easing (QE), there’s less money in the system to buy anything. If the Fed also raises rates, then money gets more expensive to borrow.

And the pace of those hikes matters, too. Goldman Sachs just said it expects four 25 basis point (0.25%) rate hikes in 2022. JP Morgan said that we should expect more volatility into the summer if not the rest of the year, and if we’re lucky we can have a soft-landing. Investors are reacting like that’s a one-two death punch for growth stocks, because with higher rates, companies financing growth will have more expensive debt eating into profit margins. Also, with less money to buy products, sales might suffer.

Naturally, higher rates and tougher borrowing benefit financials companies, like banks.

I think investors have it wrong – like so many times before. I think this is Taper Tantrum 2.0.

The Fed has to send signals, because it needs to engineer a soft landing. Rates can’t rise too fast because all the stimulus, aid and QE was designed for one thing – to keep our economy afloat and progressing.

Why would the Fed undo all those years of work now? And given how huge the balance sheet is, the Fed can’t hike rates too fast, as the interest on our federal debt will become crippling. But a raise of rates to 2% or less isn’t crippling. Even if it did raise rates that high, we’d still be under mid-2019 levels:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Fed must fight vicious inflation, but I doubt that it will cut our nose off to spite our face. That’s why I think growth stocks are actually a good buy right now. I know, it may have been volatile, ugly, and painful to be a growth investor in recent months, but it’s been glorious for the past 30 years.

The only thing that can keep our economy forging ahead is the growth of commerce. Over the long term, there’s been no better place to invest than in growth stocks. And now, with growth stocks under pressure from an overreaction – just like we’ve seen before – I think it’s good to buy growth on dips.

The FED may trickle out signs of a landscape shift, but they won’t sink us after years of rescuing us. With strategic rate hikes and tightening money, our economy can begin growing on its own steam.

As H.L Mencken said: “For every complex problem there is an answer that is clear, simple, and wrong.”

It may sound crazy, but I think the bears have it wrong once again. I think we’re about to embark on a new “Roaring Twenties.” And I think the engine will be growth.

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
So Far 2022 Looks Like 2018

Sector Spotlight by Jason Bodner
When the Fed Speaks, Everyone Listens – Way Too Much

View Full Archive
Read Past Issues Here

About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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