Is Capitulation About to Occur?

Yesterday [3/9/2023] saw a sell-off in Silicon Valley Banks as Venture Capitalists advised tech companies to withdraw deposits.  Prices of most major bank stocks were under pressure.  The press reported these companies got Powell-ed.  The term “Powelled” refers to the decrease in stock prices caused by the Federal Reserve Chairperson’s Congressional testimony on March 7 & 8, 2023 that the Federal Reserve would need to raise rates higher than expected.

The market may not have expected higher rates faster, but LawInfo did, as reported on March 5, 2023.

OK, so equity markets have sld off; moderately.  What’s next?

We can’t see the light at the end of the tunnel, but, we can see the tunnel.

Home Depot’s Chairperson commented to the press this week, that the Federal Reserve has been harmfully behind the curve; keeping interest rates low in 2021, when asset bubble and inflation was nascent.  Then, the Federal Reserve got it wrong in laet 2022, early 2023; taking the foot off the pedal, diminishing interest rate expectations too fast, too soon.

Once bitten; twice shy.  Lawinfo does not expect the Federal Reserve to make the same mistakes.  Lawinfo expects that the U.S. Federal Reserve is going to desire to establish credibility.  Lawinfo expects that credibility will take the form of a 0.5 interest rate increase this March 21, 2023, and an increase in the expected terminal rate.  Lawinfo expects that the Federal Reserve will turn its focus to the real key indicators of the economy – employment and housing.  Only when jobs & housing indicators show weakness, the Federal Reserve will the Federal Reserve slow or stop raising interest rates.

So, that’s the playbook.

We cannot see the light at the end of the tunnel.  However, we can smell the sell-off and capitulation coming.  The market will soon assess the reality that the Federal Reserve knows it must create recession to stop inflation, and that the Federal Reserve will create recession to stop inflation.  When the market sees the jobs and housing data get weak, it will sell.  Sentiment will turn extremely negative; the consensus will be its time to get out of stocks.

The date will start to get weak soon.  GM offered buyouts to nearly all white collar workers; Meta is planning even more layoffs; remote workers are wondering what to do with the homes they bought, but cannot commute to work from.

Next week we get CPI, PPI and hoursing starts.

That will be the time to buy.  Lawinfo expects that time between now and October 2023.