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The Hawkish Pause.

| June 20, 2023

You have to love writers and their use of the English language. I’m pretty sure I have not heard of the “Hawkish Pause” prior to last week’s FED meeting. But nonetheless, we now have a hawkish pause. You think there is a definition due? Yeah, me too.

The market was pricing in one more quarter point rate hike prior to the meeting last Wednesday. That would have brought the FED funds rate to 5.25%-5.5% and then supposedly the FED was done raising interest rates. That quarter point was expected at the July meeting (I showed you that chart last week).

But after the meeting where we got the ‘pause’ the market was looking for, the FED said there could be a couple rate hikes more instead of just the one that the market was anticipating.

Insert “hawkish pause.” The pause (no rate increase), but then a hawkish (aggressive) FED raising rates two more times this year. Ok, fair enough. We have been on the record that the FED doesn’t need to raise rates any further and that would likely be a good thing for the equity markets. But we’ve also said that if they really want to put the economy into a recession, they can do that and proceed to drive the ‘economic car’ into the ditch. I guess we will see how it plays out. Interestingly enough, the market is not really buying the two rate increases this year. See the chart below of end of year expectations for FED funds rates.

At this point, the market is only pricing in an 8% chance of two rate hikes, while it is still pricing in a 43% chance of at least one rate cut. Go figure! Below is a quick clip from Professor Jeremy Siegel shortly before the FED decision.

And here are comments from his weekly commentary today (click on image to expand).

On the flip side of the FED is the new AI excitement. As we’ve said in the past, there will likely be many industries changed, both for the good and for the bad over the next 10-20 years. Are some of the stocks ahead of themselves? Probably. Remember any of these names back in 2000?


You gotta love Jim Cramer! Or NOT!

Here is a chart of how many companies are now mentioning AI in their quarterly reports.

But as we know, there is something called the ‘S’ curve. It looks something like this.

Many companies don’t make it across ‘The Chasm’ and end up as a footnote in history. Potentially becoming a building block for future winners. 

I think we are certainly in the early stages of this technology and there will likely be many winners and many losers. Some winners will be obvious in hindsight, others will come out of nowhere. Keep in mind that some of the biggest companies now either didn’t exist in 2000 or were largely different businesses back then. Microsoft was an office productivity and operating system company, now it’s a cloud company (with lots of clout in video gaming, to boot). It gives away its operating system and the Office product is now a SAAS (Software as a Service) revenue model for them. Google wasn’t around, Facebook wasn’t a company. Nvidia was making video cards for gamers, only to then add to its product line GPU processors for Crypto mining and now AI chips. How about Tesla? Nope wasn’t around. Apple? They were pretty much a high-end desktop computing company catering to teachers and digital artists. Now primarily a mobile computing platform company (oh and almost went out of business).  You wouldn’t have guessed 20 years ago how it turned out (Apple now being the biggest company in the world and not letting up!). I would guess you (and I) won’t be able to guess how AI turns out 20 years from now.

Finally, we mentioned that our model is now favoring equities, but we said the market was very narrow and would need to broaden out if this is to be sustainable. Well, the market just broke out of a 3-year consolidation in the cumulative A/D (advance/decline) line (measures up stocks versus down stocks). Here’s a chart of the previous times this happened.

And here’s what happened in the following 12 months.

It is yet one more data point to say that maybe this can be durable. Nothing is guaranteed, but if history is any guide, it certainly tips the odds in favor of a market that can have a durable trend. We will see what happens in the next 12 months.

Finally, I hope you have a great rest of the shortened holiday week and as always, please let us know if you have any questions.