Kevy hiked, the market got hit, then investors slept on it, stocks rally

Ok – sports fans – here we go…. Yesterday.

The Fed HIKED 25 bps, taking fed funds to 3.75%–4.00%. All 12 voting members voted unanimously to hike rates by 25 bps, and the dot plot suggests at least one more hike this year.

At 2:30, the VIX (fear index) was 16.25. During Kevy’s press conference, it exploded to 18.94 up 17%. Markets are now pricing in a 50% chance of another hike in October.

The S&P went right down and tested 7,500 — exactly the level I told you to watch if investors were disappointed.

The 2-year surged by 7 bps as traders repriced the path of monetary policy, while the 10-year ended the day yielding 5.02%.

WTI closed at $102.10/barrel – up 71% since the conflict began, Diesel is now $6.30/gal – up 77% - as Middle East disruptions continue. Gold fell, dollar rallied.

Well, There You Have It… that was yesterday….by the end of the day.

The Dow lost 630 pts or 1.2%, The S&P lost 33 points, or 0.5%, the Nasdaq lost 3 pts, the Russell down 11 pts or 0.4%, the Transports lost 574 pts or 2.8% (think oil/diesel), the Equal Weight S&P lost 46 pts or 0.5% while the Mag 7 lost 41 pts or 0.1%.

And let me be clear – while I didn’t THINK they should raise, I was well aware that a hike was inevitable…..I mean I made it clear – that both Bloomberg and the prediction markets were calling for that hike….so, I was not surprised that it happened, I still think they made a mistake, but I don’t get a vote.

In any event - The market handled it until it didn’t…. At 2:30 pm Kevin Warsh stepped up to the microphone and suddenly the Sh*t hit the fan.

Of the 11 S&P sectors - nine ended the day lower with Financials – 1.6%, Energy – 2.8%, Communications – 0.9% - the worst performers while Tech and Healthcare were both up 0.1%.

Further down the list – we found strength in the semi’s – SOXX + 0.7%, Memory names – DRAM + 0.6%, Aerospace & Defense + 0.3%, Quantum Computing + 0.4%. And of course, the contra trades ended the day higher…the SH + 0.5%, DOG + 1.2%, SARK +0.4%, SPXS +1.3%.

Homebuilders got whacked – down 1%, Retailers – 0.6%, Airlines down 0.3%, Metals & Miners lost 0.6%, Cybersecurity lost 0.7%.

But overnight? The picture changed. Cooler heads seem to be prevailing. Treasuries are up, and that is sending the 10-yr yield down by 3 bps at 4.98%.

S&P futures are higher, European markets are higher, Brent is down 1.5%, WTI is down 1%. Gold is up $55 while the dollar is little changed.

On Monday, I laid out four possible scenarios for the Fed and the bond market.

Yesterday afternoon we got the one I told you I DID NOT want to see. Scenario #2 - The Fed HIKED — and the 10-year ROSE.

BAM!

The Fed tightened at the short end while the bond market refused to give us any meaningful relief at the long end, and the traders and algo’s did not like it at all…. They did what they always do – shoot first and ask questions later.

But then everyone went home, they had dinner, they considered the alternatives, they re-read his statements, they thought about what he said, and then they went to bed and this morning the reaction appears to be very different – And that is why you don’t make investment decisions based on the first 30 minutes of a Fed press conference on FOMC day.

So, now we have to reconsider the 4 scenarios…because scenario #1 – Fed Hikes and the 10 yr falls - appears to be the one investors & traders are focusing on now…. That’s the cleanest outcome. The Fed demonstrated that it’s serious about inflation. Long rates retreat, Mortgage rates should get some relief over the coming weeks and the pressure on stocks should ease causing everyone to breathe a sigh of relief. Now I’m NOT declaring victory just yet, because one overnight move doesn’t make a trend.

Now, there’s another reason the bond market - and the stock market - may be celebrating this morning: OIL.

Oil prices are falling, and that’s where this gets even more interesting. Because if crude prices fall AND the 10-yr yield falls, then two of the biggest pressure points on stocks begin moving in the right direction at the same time.

Recall, the most recent spike in crude came after Iran attacked pumping stations on Saudi Arabia’s critical East-West pipeline, which carries crude across the country to the Red Sea export terminal at Yanbu. The pipeline had to be shut down, creating new fears that a prolonged disruption could remove as much as 4% of global supply from that route. But that story is changing this morning.

Some of those worst-case supply fears are beginning to ease. The Saudis are offering additional crude using ship-to-ship transfers off Oman’s Sohar port, helping compensate for the pipeline disruption. And there are indications that crude could begin flowing through the Saudi pipeline again within days.

And this matters. Because if the supply problem begins to get resolved, oil retreats. If oil retreats, gasoline and diesel should eventually follow. Inflation pressures and inflation expectations should ease. That should take some pressure off the long end of the treasury curve, which in turn should provide some relief for mortgage rates, corporate financing costs and stock valuations. But this is not going to happen today…. (just fyi…)

Remember what I’ve been saying - the Fed can’t create more oil. But if the supply side starts to normalize at the same time the Fed is serious about inflation, then suddenly Kevy gets some help.

But let’s not break out the champagne just yet.

The Middle East remains a HOT spot. The conflict isn’t over. The Strait of Hormuz isn’t operating normally. Crude remains above $100. And perhaps most importantly, we still need to see refined-product prices – think diesel - come down.

So yes, things look better this morning. But better isn’t the same thing as fixed.

This morning – the VIX (fear index) is back to trading in the complacent zone…. It is down 9.7% at 15.99 below all 3 trendlines – suggesting that investors are not panicking at all.

Gold is up $50 at $4,315 this morning after testing trendline support at $4,280 yesterday. Now, if investors become convinced that we’re entering a new and sustained rate-hike cycle and that pushes real yields and the dollar higher, then I would expect gold to hit a wall. Remember, gold doesn’t pay you anything to own it, so as real yields rise, the opportunity cost of holding gold rises with them.

But there’s another side to this trade. If the geopolitical situation continues to deteriorate, or if inflation refuses to respond to tighter monetary policy, then investors could continue to seek out gold as both an inflation hedge and a safety trade. And that’s what makes gold interesting right here.

For now, the chart suggests we’re stuck in this $4,280–$4,540 trading range. We tested the lower end yesterday and bounced. If we break $4,280 then the technical picture deteriorates and if we bust up and thru $4,540 then the bulls are back in control.

Eco data today includes the Philly Fed Business Outlook, Housing Starts – expected to be up 6.7%, Building Permits expected to be down 1.5% along with Pending Home Sales – which are expected to be down 3.9% y/y.

European markets are all higher…. all up by about 0.5%.... Today it is the UK’s turn – the BoE is expected to announce their monetary policy decision – and as expected they held rates steady and delivered a more hawkish message.

US futures are higher…. Dow futures are up 360 pts, S&P’s up 65, the Nasdaq is up 312 pts while the Russell is up 32 pts. Now, let’s keep it real -

YTD – this is not a disaster at all…the S&P is up 10.3%, the Nasdaq is up 11.7%, the Russell is up 15.2% while the Equal Weight S&P is up 10.5%. This despite everything we’ve been through – a war in the middle east, $100+ oil, inflation, a 5% 10-yr and now the first Fed hike in three years and still investors have been rewarded.

Now, the next four weeks are going to be important.

We still have to consider the Fed’s next move. Every inflation report now matters because every one of them is going to help answer the question: Was yesterday’s hike enough for now - or does Kevin have to go again?

In two weeks, we will get the latest NFP report. As long as the labor market holds together, the Fed has room to stay focused on inflation. But if jobs suddenly weaken while inflation remains sticky? Well, then Kevy’s job gets a whole lot more complicated.

We still have the whole oil and Middle East debacle to deal with. Yes, crude is backing off this morning, but let’s not get too comfortable. We are one missile or one drone away from damaging another pipeline, another cargo ship or another piece of critical infrastructure — and suddenly that geopolitical risk premium is right back in the barrel.

Then we’ve got the bond market. And while the 10-year is back below 5% this morning, don’t assume it’s all over. There is a huge amount of Treasury supply coming, and that is going to test investor resolve. If demand is there and the 10-yr continues to retreat - great. But if buyers balk, the 10-yr flips and pushes up and through 5% again, then stocks are going to get slapped again.

And then comes earnings. JPM and the other big banks begin reporting on October 13, marking the official kickoff of earnings season. And THAT is when the rubber meets the road. Because at that point investors are going to stop debating Kevin Warsh, oil and the 10-year and start asking companies about the stuff that ultimately matters: Show me the money!

That will be especially true for those premium-multiple technology and AI names. If rates remain elevated, investors are going to become much less forgiving when somebody misses a number, misses on margins or offers disappointing guidance.

We’ve had a good year so far, but there are plenty of potholes between here and the middle of October. Stick to the plan…. don’t chase it, don’t panic and don’t get emotional. Know what you own. Know why you own it. Confirm your thesis — and then let your investments work for you.

The S&P closed yesterday at 7,552 — down 34 points. Keep your eyes on 7,511 as support. That shouldn’t be the issue today with futures pointing higher, but that’s the level I want you to watch in the days ahead. The upside is the all time high at 7800.

Watch the 10-yr. A pullback toward 4.80% over the next few weeks would be a HUGE win for stocks and would take some of the pressure off of valuations.

Seared halibut with white wine and artichokes

Prep time: 20m

Cook time: 20m

Total time: 40m

Serves: 4-6

Ingredients

4- Pieces of Halibut

6 butter, olive oil

2 sliced shallots

6 artichoke hearts - Artichoke hearts can be frozen or if canned - just rinse and slice in half. Dry white wine

Preparation

Step 1

Season the halibut with s&p.

Step 2

On med heat - Add - 3/4 stick butter, a bit of olive oil and 2 sliced shallots...sauté shallots until soft 3 / 4 mins. 

Step 3

Add sliced artichoke hearts and sauté with the shallots - 3 / 4 more mins.

Step 4

Turn up the heat and Add halibut and sear on one side...flip the halibut - and then bathe in white wine ...bring to a boil, then reduce heat to med low & cover and steam for 10 mins....test to make sure the halibut is cooked to perfection.

Step 5

Serve - on a warmed plate - with steamed French cut green beans seasoned with olive oil, salt and pepper and roasted butternut squash.  As always include a mixed green salad dressed in a red wine Vinaigrette.  The colors of the veggies (green and yellow) accented with the whiteness of the Halibut make for an eye appealing - sensory stimulating presentation.