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Last week I wrote that if the Fed has to choose between preserving confidence in the banking system and fighting inflation, they will understandably select the former. The consequence was a $300 Billion increase in the Fed’s balance sheet in a week which basically wiped out half of the reduction they did in the past year. As suspected, the big winners were government bonds, gold, and bitcoin as people flew to perceived safety. What was a bit surprising was the big surge in mega and large-cap tech stocks. I get the reasoning – they are cash-rich, they have pricing power, so they are likely to endure any crisis. There are rare assets in a way. People gave them a vote of confidence. There might have also been a significant rewind of the inflation trade. We saw crude oil and most commodities taking a decent plunge while big tech squeezed higher.
In the meantime, the banking crisis hasn’t been resolved yet. Just look at the price action in bank stocks last week. The bank ETF, KBE was down another 20% and finished near the lows of its weekly range. In-between financials and basic materials in the gutter, the S&P 500 and Russell 2k don’t stand a chance for a sustainable rally.
Next on deck is another FOMC meeting this coming Wednesday. The Fed is expected to raise rates by only 25bps, if at all. Their guidance will matter more as the market is basically expecting a pivot very soon. I don’t want to guess how the market will react. I rather position after the dust settles on Wednesday and take things one day at a time in this environment. If Powell makes more hawkish statements, the market might get worried and accept a recession scenario during which the tech sector will also get hit. If the Fed blinks and says that they will wait on further rate increases, we might see a continuation in tech strength. Gold and bitcoin are likely to do well in both scenarios.
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