To be clear, I don’t care what he said. Instead of hanging on the Fed Chair's words, I prefer to focus on the markets. I find it more enjoyable.
But, boy, did markets respond!
The most striking aspect of yesterday’s reaction was highlighted by the relative strength of growth stocks.
Check out the overlay chart of the US T-Bond ETF $TLT and the ARK Innovation ETF $ARKK: These charts tend to move tick-for-tick, as long-duration assets benefit from the same market environment.
It doesn’t matter that one ETF holds the largest tech names across the market while the other a basket of long-term US Treasury bonds.
Whatever Powell said in addition to “disinflationary,” investors heard rates will fall and began pricing in the news immediately.
ARK is an excellent example, as it continues to climb, printing fresh four-month highs today.
On the other hand, bond investors are a bit skeptical as TLT continues to churn below its June pivot lows.
Don’t get me wrong – I’m not complaining about a lack of volatility from the bond market. It generally bodes well for risk assets.
I simply would expect more of a reaction from rates based on the strength of growth stocks.
Are growth stocks jumping the gun? Or are they taking the lead, with the expectation that bonds will follow in the coming weeks and months?
I don’t know. But I don’t want to make the bet these two charts resolve in opposite directions.
Meanwhile, investors continue to be rewarded for buying stocks.
That’s a trend you don’t want to fight.
Stay tuned.
Countdown to FOMC
Following yesterday's single-hike, the market is pricing in another single-hike at the March meeting.
Here are the target rate probabilities based on fed funds futures:
