That iconic moment in the cult classic “The Warriors” was replayed yesterday on the mean streets of the financial world when Fed James Bullard told the bulls to “Come out and play.”  The movie saw a night of chaos throughout New York City one summer night after a major gang leader was assassinated.

Instead of clanging empty coke bottles, Bullard suggested Fed funds could go as high as 7.0%, flashing a chart that shocked the investing world.

He was the ringleader as other members of the Federal Reserve chimed in with taunts and jeers, leaving no doubt that they are the toughest gang out there and they are united in their goal to fight inflation.

Predictably, equities swooned at the open as bond yields zoomed higher. Finally, stocks found their footing and pushed higher into the close. Still, the Fed has upped the ante, which means any inflation report stronger than the consensus could trigger an even harsher reaction.

Bullard Shot Across the Bow

Bullard introduced the notion that Fed funds could hit a terminal rate of 7.0% to tame inflation. He laid it out in a chart and provided bullet points (below):

Fed fund rates have already seen record moves higher this year, and the debate over another 75-basis points (bps) hike had begun to lose steam.

Still Not Believing

Although stocks tumbled out of the gate and bond yields spiked, the Street sees 5.00% - 5.25%, then all hell breaking loose, forcing the Fed to cut rates twice next year. In other words, they will break a lot of stuff by next summer.

The ten-year bond yield did close near the high of the session and remains above the trendline but also well off the recent high point.

Heat Map

Tech (XLK) was higher, but unlike in the old days, it couldn’t drag the entire market above the plus line.  On the other end of the spectrum, Utilities (XLU) were the hardest hit.

One of the reasons to be leery of “safe” stocks is their historic valuation – they are too expensive.

Earnings Season

Market psychology is amazing. Overnight a bunch of retailers posted results, and their stock erupted higher (Gap (GPS), Burlington (BURL), Ross (ROST), and Macy’s (M)), keeping the trend going. Check out the big move since earnings season that was going to be the death knell for the market. I always love when everyone on Wall Street says earnings will be a disaster.

Earnings estimates are plunging along with the yield curve and stock market – this will become  excessive.

Portfolio Approach

We are adding a new position in Consumer Discretionary to our Hotline Model Portfolio. If you are not a Hotline subscriber, email Info@wstreet.com to get started today. 

Today’s Session

The market opened higher, and this really angers Wall Street pros that want to see retail investors throw in the towel.  Instead, bullish sentiment surged in the past week.

Moreover, firms like Bank of America private silent equity holdings are so high they are considered a sell signal.  Always ask yourself what happens with an avalanche of retail investor selling that makes stocks cheaper – who would be down there buying with both hands?

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