Date: September 22, 2021

Textbook Bullish Setup as Fed Concludes Meeting With Some Uncertainty

FINALLY, we have a FOMC meeting where the outcome isn’t a certainty. HURRAY!

First, let’s get discuss how the stock market is supposed to behave. It’s Fed day so the stock market usually trades in a band of plus to minus 0.50% until 2pm and then see a bigger move, usually to the upside. That trend has not played as well under Jay Powell as it did under Yellen and Bernanke.

Stocks have also sold off into the Fed meeting which is bullish for the day of announcement as well as the next few days. Finally, the stock market traded poorly the day before announcement day. That also gives the bulls a big edge on announcement day. All of the ingredients are there for big day for the bulls although in an absolutely perfect world, the stock market would open lower today.

As I have written about this week and last, this modest pullback should set the stage for new highs across the board in Q4. Yes, I know. Q4 begins in less than two weeks. I remain firm that this bout of volatility is a buying opportunity, whether the bottom is in or we see a marginally lower print. Buy weakness and make sure you have conviction in what you own.

Yesterday, we bought small cap value at the expense of growth and added to our technology position in internet. We also bought more CRM, LOW, FB at the expense of CI and some BRK.B.

Getting back to the actual announcement, you have heard me rant over and over and over about how buying $120 billion a month in Treasury and mortgage bonds is completely absurd. Where’s the market crisis? Economic? I was the biggest champion of the Fed in March and April 2020 when they took unprecedented measures to keep markets functioning properly. Bravo!

Forget about 17 months later, even 7 months later the markets were more than stable. The housing market has never been hotter, yet the Fed has just kept on buying $40 billion of mortgage bonds each and every month. Why? Jay Powell says that buying mortgage-backed bonds doesn’t support housing or mortgages. Huh? Then why were they purchased in the first place?

The economy has dislocations. The monthly non-farm payrolls (employment) report remains a mess and all over the place. However, the most wide-reaching data say that the economy is strong, the strongest since Ronald Reagan lived at 1600. The rate of acceleration in growth has peaked. Fact. Earnings acceleration has either already peaked or will peak in the next two quarters. But that’s what happens early in every recovery. The lowest hanging fruit has been picked, but the expansion can live on years longer.

I do not see recession anywhere on the horizon. It’s long overdue for the Fed to announce their plan to taper asset purchases and start that process in 2021 so they can conclude the plan by the middle of 2022. That would give them the runway to begin to raise interest rates in Q4 2022 or early Q1 2023.


Paul Schatz, President, Heritage Capital