Pro Perspectives 3/24/23

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March 24, 2023
As we end the week, let's take a look at a couple of charts.
Here's a look at the S&P 500 …

After a volatile couple of weeks, stocks close above the 200-day moving average (the purple line), and above the big descending trendline (the yellow line) that describes the bear market of last year.
The bounce back in stocks today was largely sparked by news that the Treasury had called an emergency meeting with the Financial Stability Oversight Council.  This group includes the Treasury Secretary and the Fed Chair, along with leaders from a host of regulatory agencies.  
This reminds me of the emergency meeting Mnuchin (Treasury Secretary under Trump) called in response to the collapse in stocks in December of 2018.  Oil was crashing.  The yield curve had inverted for the first time in a decade.  Mnuchin called in the President's Working Group on Financial Markets
This group was formed by Reagan following the 1987 crash.  It's officially a smaller group than the Fin Stability group, consisting of the Treasury Secretary, the Fed Chair, and the heads of the SEC and CFTC.  But it also is done in consultation with the leaders of major banks (they call in the banks). 
As a whole, this group is better known as the "Plunge Protection Team."
So, stocks went into that 2018 Christmas having the worst December since the Great Depression.  This group met the day after Christmas.
That was the turning point.  The bottom was in for stocks, that day.
What does the current environment have in common with December 2018?  Bad Fed policy
In December of 2018, in the face of clear warning signals, the Fed continued to mechanically raise rates for a ninth time, projected another two hikes for 2019, and Jay Powell said their quantitative tightening program was on "autopilot."  Stocks fell a further 8% in just four trading days — penalizing a tone-deaf Fed. 
So, it took intervention by the Treasury to stabilize and turn the tide for markets.  And within just days of that meeting, in response to the calamity in markets, the Fed marched out, not just Jay Powell, but also two of his predecessors (Yellen and Bernanke) to walk back expectations of more Fed tightening.  By July they were cutting rates again.
Fast forward to today, and here we are again, in the face of clear warning signals, the Fed has proven tone-deaf, mechanically raising rates, and projecting another hike.  
And again, we have an emergency meeting called by the Treasury.
How does the bond market see this resolving?  

The 10-year Treasury yield is now 163 basis points BELOW the Fed Funds rate.  It historically trades about 90 basis points (on average) ABOVE the Fed Funds.  
As you can see in the chart above, this dynamic tends to resolve in rate cuts.
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