When it comes to the Fed's quarterly (and soon monthly) press conferences, it's widely expected that the Fed chair will manipulate and goalseek the message to reach a desired market outcome. After all, if the past ten years have taught us something, it is that the Fed only cares about the market reaction and micromanaging equities. And to do that, the chair will do and say anything, obfuscating - in the best Alan Greenspan tradition, putting the audience to sleep - as only Janet Yellen can, and generally lying as much as needed to give traders the comfort that the Fed is "with them."
The problem is when research analysts start doing the same, and instead of at least pretending to be intellectually honest, they steamroll through the facts and create a fabricated version of reality, padded by hubris, meant to validated their version of the world, no matter how wrong.
We are sad to note that JPM's head quant Marko Kolanovic has done just that tonight, and in a note meant to validate his recent uber-bullish outlook, 'explains' that the stock reaction to the Fed is not what it should have been - even if that's not the case for other asset classes, which slumped admirably, i.e. just as Kolanovic had expected, and suggest a "near-term goldilocks environment. As for equities, here Kolanovic finds offence because the "price action of the S&P 500 was not coherent", i.e., they also went down: "first we saw a strong rally and reversal, then another (smaller) rally and reversal, with the market ending slightly down."
But if bonds and FX were right and stocks were wrong, and the Fed was dovish, something has to explain this divergence in reactions, right?
Yup, and according to Kolanovic - the most respected quant at JPMorgan - the answer is.... snow.
We are not joking: the man who for the past 3 years has been explaining how the market is almost entirely controlled by algos, latent positioning, and generally non-human reactions, stakes his reputation - to use a Gartman term - that it was the lack of carbon-based traders, that spoiled the market response Kolanovic had been hoping for.
Here is his note.
Bond yields went lower, USD weakened, and the yield curve steepened – all of which are positive (dovish) signals for US equities
As we suggested in our previous note (here), fears of the Fed delivering a hawkish message did not materialize. 2018 dots were not revised higher, and the importance of the 2019/2020 dots was downplayed by Powell (realistically, no one can have visibility 2 years out). Bond yields went lower, USD weakened, and the yield curve steepened – all of which are positive (dovish) signals for US equities. Furthermore, there was no significant change in inflation expectations and the growth outlook, alleviating recent equity markets concerns. This outcome is a positive and indicates that equity investors could expect a near term goldilocks environment.
In contrast to the Fed, price action of the S&P 500 was not coherent - first we saw a strong rally and reversal, then another (smaller) rally and reversal, with the market ending slightly down. We note that this happened on very low volumes (particularly in light of the importance and anticipation of the catalyst).
This was likely the result of a severe snowstorm affecting the US northeast and incomplete market participation (e.g. it was one of the lowest futures contract volumes on any Fed announcement days). Market direction was further confused by the initial reaction of bonds and rotation out of tech and momentum stocks, inflows into small cap, value and high volatility stocks, and covering of high short interest stocks.
Well, yeah, it's always something else when the market doesn't do as you had expected. And while by now it is all too clear that Marko got one or more taps on the shoulder to toe the JPM bullish line no questions asked, here it is once again.
We maintain our positive near term view on US equities. Our view is that the path of recovery is likely to mimic the August 2015 selloff that was also driven by systematic selling (Figure below compares equity price action in the aftermath of August 2015 and February 2018), as market volatility subsides (prompting re-leveraging of systematic strategies), continuation of strong buyback demand, and focus shifting to strong upcoming earnings season.
And now, those who are eager to bet on whose reputation is torn apart first: that of Gartman, who last week made a "watershed call" that the market has hit all time highs, or Kolanovic, who recently predicted that the market will keep rising to new records, you can make your bets now.