Technical Bounce Maybe

A couple things I keep in the back of my mind.

1. The Fed will choose a stock market crash over inflation. Why? The Fed can stop a market crash at some point. Most likely, a crash will eventually take down commodities and lift bonds. It will alleviate the inflation risk. If the Fed doesn't stop inflation now, it will eventually have to crash the market from much higher levels and sink the economy into a depression, to stop inflation. It's always better to fall from a lower height, when a fall is inevitable. Finally, we could seriously discuss eliminating the Federal Reserve if inflation takes off. The Fed is taking a lot of political heat for inflation, but it didn't take this kind of political heat when stocks fell. Maybe Powell is a moron, but if not, inflation is enemy #1 until it dissipates.

2. The market still strikes me as desperately bullish or desensitized to real markets. I keep seeing historical data and analogs only from the current bull market. I've seen claims of extreme negative sentiment that only go back to April 2020. Here is a good analog, but also an example of this:

The Federal Reserve announced the taper in May 2013, ended the taper in October 2014, and raised rates in December 2015. That is 31 months from taper announcement to 25bps rate hike. If you want to add in QT (balance sheet reduction), we're talking more than 50 months from taper announcement until normalization. Stocks were also modestly above their 2000 high at the time. Go look at the chart if you don't believe it. The Fed announced their taper only 3 months after the S&P 500 Index cleared the year 2000 peak.

This time, the time from taper to balance sheet reduction could be as little as 8 or 9 months. I do not expect QT will start that quickly, assuming I'm right about inflation coming out of the economy, but there will be rate hikes in March. Likely 50bps as things stand today. That is 5 months from taper announcement to rate hikes, or about 6-times as fast as the prior cycle. As for stocks, I can be generous and say the entire bull market up to February 2020 is solid, but that still leaves an incredible bear market if the Fed- and USG-induced melt-up reverses. Vulnerable stocks plus an extremely aggressive Federal Reserve doesn't invalidate prior analogs, but they need to be compressed. A lot is about to happen in a short amount of time.

In short, I do not see any evidence for a bounce with legs. I of course will change my mind as needed, but my sense is a rally will be technical rather than fundamental. The market is still improperly valuing stocks in relation to other concerns such as inflation. Stocks are the man, the Federal Reserve is the woman. Stocks think the Fed is the one and is ring shopping. The Fed is already thinking about how it's going to dump the stock market for the bond market.