Stock Market Hope Springs Eternal

Imagine a captive, bound and hapless…

There he is, chained down pitifully in his cell, resigned to his inevitable punishments. Fifty lashes across the back are due him.

Then comes the retributional day…

This unfortunate winces in anticipation of his 50 lashes — yet his “merciful” captor issues a mere 25.

This he interprets as “good news.”

He momentarily forgets the fundamental fact that he absorbed 25 stinging lashes across the back.

Shall we liken the stock market to our theoretical captive?

Federal Reserve Chairman Jerome Powell talked on Wednesday. He said this:

It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.

Wall Street interpreted Mr. Powell’s babblings as bullish — as 25 lashes spared. If not a “pivot,” the Federal Reserve will at least moderate its remorseless aggressions.

Gone are the prospects of yet another 0.75% rate jacking.

“Why do you stop banging the prisoner’s head against the wall?” asks the torturer. Answering his own question:

“Because it feels so good to him when you stop.”

Stocks were immediately up and away. The Dow Jones ended trading over 700 points higher on Wednesday. The rate-sensitive Nasdaq Composite leapt 484 points.

Yet Wall Street was so dizzied by the mercy of its captor, by its 25 spared lashes, it failed to perceive the searing stings of the 25 lashes it did receive.

Mr. Powell, from his same Wednesday talk:

The timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy… we will stay the course until the job is done.

There you have the 25 lashes across the back. Is this the talk of a man offering clemency?

The latest inflation reading comes in at 7.7%. Yet the federal funds rate squats between 3.75–4%.

That is, the Federal Reserve still confronts a desperate chase. Inflation runs far in front of it.

Mr. Powell and mates may slow their pace some… but only to conserve their energies. The race ahead is long.

Meantime, November’s unemployment numbers came issuing this morning. They surprised massively — to the upside.

The “experts” had divined some 200,000 fresh November payrolls. Today’s report revealed 263,000.

We will put to one side any concerns we harbor about the validity of reports such as these — and we harbor many. We will simply accept the Bureau of Labor Statistics at its word.

Today’s report certainly informs the Federal Reserve that its aggressive hikings have yet to bottle in the economy — and that it can safely continue its tightenings.

Perhaps that is why stocks were subdued today?

The Dow Jones scratched out a meager 35-point gain, while both the S&P 500 and the Nasdaq Composite posted losses.

Under normal circumstances a “blowout” unemployment report might jubilate the stock market.

Yet today’s circumstances are not normal. And positive news for Main Street often translates to negative news for Main Street. It is the warrant for additional tightening — a “green light” for additional rate hikes.

And Wall Street is against them. Thus Wall Street took some lashes today.

Will it prove enough to bottle the market’s residual joys from Wednesday?

We will have our answer soon enough.

The Daily Reckoning