No Rate Increase Relief In Sight
A couple of days ago we were speculating about the potential market reaction to the Jackson Hole symposium. Now we know. After Chairman Powell spoke this morning, the markets tanked with the Dow down 3.03% on the day, the S&P 500 down 3.37%, and the Nasdaq down 3.94%. And the VIX rose to 17.34%. The gist of Powell’s talk was that the Fed is going to keep raising interest rates and downsizing their balance sheet in order to quell inflation. This dispelled any wishful thinking that Powell would relent on rate increases in order to protect the stock market. There is not rate increase relief in sight.
Price Stability and a Health Economy
Powell’s talk did not take place in a vacuum. Two Fed presidents, James Bullard of the St. Louis Federal Reserve and Raphael Bostic of the Atlanta Federal Reserve were guests on Bloomberg in the hour before Powell’s speech. They emphasized the need to stay the course in tamping down inflation and the theme that price stability is essential to a healthy economy. Powell simply confirmed the theme that his lieutenants prepped the market for and then went on to admit that it may be necessary to tolerate lower employment numbers and substantially slower growth to the point of growth being negative (a recession) in order to achieve their long term goal of 2% inflation. Bullard commented that interest rates of around 4% (or more) into next year are likely.
Immediate Versus Longer Term Market Reaction
When viewing the market reaction by plunging even as Powell was speaking one is tempted to respond, DUH! What did everyone think? As Powell spoke and the market upward spike when he was speaking a couple of months ago came to mind as well as the subsequent collapse. Are we going to see a rebound in the futures market and an uptick in prices on Monday? There are always those who “buy the dip” no matter how dire the overall situation. Our overarching option has been that Biden’s sophomore year would be bad. Now Putin is talking about adding more than 130,000 to his military (although there is no mention of conscription) and Russia is burning off $10 million worth of natural gas every day while Europe braces for a cold winter and horrific fuel prices. The war in Ukraine and its economic fallout will continue, China is showing no signs of letting up on their threats about Taiwan, Iran and North Korea are still causing trouble and the Democrats are still spending. Our DRINC acronym analysis tells us that there is more trouble ahead so one should not be surprised if the market makes its way lower. What was surprising this week was the wishful thinking of the market up until Chairman Powell opened his mouth to speak.
Trading Options In an Era of Inflation
There are enough issues that can drive markets lower to worry any investor. On the other hand, options traders need not be quite so worried. That is because with options trading and especially here at Top Gun Options we can potentially print money no matter how efforts to stem inflation affect the economy and the market. However, this is not necessarily an easy market for trading options. As such, one will be wise to avoid trading options solo. Rather consider signing up with one of the trading squadrons at Top Gun Options. We called the Covid crash to the day. We called the Covid recovery within a couple of days. While fortunes were being lost, we virtually printed money. While the smart money missed the boat, we made millionaires out of little old ladies in tennis shoes. Check out Top Gun Options today.