Here's what the true bears, the ones who hate the stock market, never seem to get: when push comes to shove, a lot of people believe things will ultimately go right. And that's how you get a market like Tuesday, when the Dow went higher by 0.74%, S&P 500 jumped 1.13%, and the Nasdaq just crushed it by going up 1.95%. 

Let me say right up front: the market shouldn't be going up. We have rampant inflation, interest rates going higher, companies may soon miss earnings estimates and guide to slower growth, a behind-the-curve Federal Reserve, and a non-zero chance of a nuclear war thanks to the unhinged leadership of Vladimir Putin. So, how the heck can we rally? Where did all the sellers go? For 2 weeks we had sellers willing to go through buyers, meaning they didn't care if they sold stocks below what the buyers were willing to pay. They just wanted out. Things are arguably worse now than they were 2 weeks ago, yet the market is holding up better (higher stock prices). Does that make any sense at all to you?

The answer is yes, if and only if you suspend your rigor and just have hope. Now we don't endure hope as an investment strategy, but when you zoom out, it's an interesting mindset. Why? When I was born some 23 years ago, the Dow Jones Industrial Average was at 10,000. Now it's near 35,000. There were a lot of moments that the market went up seemingly undeservedly given the inputs, but then we found out the inputs were wrong, or things went a different way, and then the rallies suddenly made sense. The market couldn't triple on the back of false information. 

Let's take 2 weeks ago vs today. We know that every inflationary measures have gotten worse by the day. We have become seemingly numb to the slaughter in Ukraine that was helpless to stop because Putin is crazy enough to go nuclear if the United States gets directly involved. Rather than mutually-assured destruction, Putin is adopting a strategy to act as crazy as possible to scare his opponents into staying on the sidelines. If things are worse than 2 weeks ago, why is there more hope? 

Well, last week we had a Federal Reserve meeting where Powell made sure everyone knows that he is poised to raise interest rates rapidly because the economy is overheating. The result of that statement? One of the greatest market rally since 2020. Then yesterday Powell again talked about rates and inflation, saying he has no problem doing a 0.50% rate hike if inflation gets out of control. Initially the market took a dive on that statement, fearing that the Federal Reserve will destroy the economy. But today, upon further review - or hope - the market took a different conclusion, much like what happened last week when the market roared higher after Powell's first rate hike. A week ago there were 2 camps: those who think that Powell could easily throw us into a recession, and those who think that Powell is simply too soft to meaningfully stop inflation. Now I think there are fewer skeptics given what Powell had said in the past few days. Last week Powell acknowledged that inflation hasn't been going as he predicted. Yesterday we saw Powell struck a perfect balance, assuring that he won't throw the economy into a recession, yet still holding his license to control inflation. He was forceful, albeit, flexible. In other words, Wall Street is now more comfortable being in Powell's hands as he fights inflation.

What does that mean for stocks? Powell is taking out the extremes. Companies that have seen their stocks soared on the back of inflation because of pricing power (steels, plastic, papers, ...) better get used to a world where they will have less pricing power, because higher interest rates reduces buying power and they will no longer be able to push through more price increases. Stocks that do well in a recession (healthcare companies like Eli Lilly or Pfizer) all declined heavily today in an otherwise strong market (meaning the defensive stocks were weak today). This is a remarkable moment because it's not supposed to be this good. There should be more people saying that Powell will fail in his combat against inflation and he's a paper tiger. There should equally be people saying the economy can't handle the rate hikes. But both of their silence, as measured by the strong 3-to-1 advance-to-decline ratio in the stock market today, is simply deafening. 

How can people be so confident that Powell won't crush the economy? I think it's dawning on Wall Street that this economy is so strong that it can handle a series of rate hikes, because so much of the spending we're seeing is related to the great reopening and the normalization of remote work. However, as much as I appreciate the hope, I'm not as confident as the buyers who were paying higher prices at the end of the day for stocks. I suspect things are not that rosy. We're seeing a level of enthusiasm that to me seems unjustified. We shouldn't be going back to the mentality where we like all stocks, because so many of them will miss their earnings estimates and hit us with negative forecasts. It's clear that many stocks who have been stuck in a prolonged bear market has been sprung higher by Powell's comments. The high-flyers who have been stung by inflation since last year have suddenly gotten a new lease on life. But here's the problem. Tons of those stocks aren't worth as much regardless of whether Powell steers us into a soft landing or a hard landing. It will soon come a time when they are sold again, likely when we get more economic data pointing to hotter inflation and realization that rates will go even higher.

So let's recognize that this is the moment when Wall Street acknowledges that Jay Powell will use all the tools at his disposal to control inflation, slow down the economy, giving us time to fix supply chains, re-stock inventories, balance out the supply-demand dynamic. 

One question that I think many of you have: if a company is doing really great, what the heck does it matter about the Fed? Why are you talking about the Fed so much? I sympathize with that view. I agree that companies should be valued based on their own merits. But sadly that's not how it works anymore. The invention of Exchange Traded Funds by greedy Wall Street managers have group stocks of a sector together, both the goods and the bads, so that when one goes down, the others follow. 

The bottom line: right now, we need to bow down to the Fed and the forces of inflation. Anything that may bring down inflation, including tough statements from the Fed, will make Wall Street money managers more comfortable in buying stocks rather than sell them. For the moment, that's what's controlling the stock market.