So the markets have shifted from fun in the sun to sad and mad, and as we were talking about for the last few weeks, it was always going to be inevitable that we'd see a turnaround before we broke towards those new all-time highs. But during the several week uptrend and recent turnaround the last few days, we've gained some extremely valuable insights into what is actually needed for the market to get the green light and go strong. And that's actually eerily clear if you go through the trajectory of what's been happening on January 4th hither we marked the last market top the next day. On January 5th, the minutes from the Feds Fomc December 14th to 15th policy meeting were released and they started sewing a whole new wave of doubt and ambiguity about how the Fed was going to handle this inflation crisis.

Markets were then left to speculate on how much more hawkish the Fed was going to be, and the Fed refused to be very clear at all. Many participants acknowledged that the Federal funds rate may need to be increased sooner or at a faster pace than participants had originally anticipated, with balance sheet runoff soon after, but details were scarce, so the market was left to speculate one left to speculate. A negative catalyst. What do markets do? well? They naturally fear the worst and try to factor that in.

That led to a massive sell-off just a day after those all-time highs and mark the start of a huge risk off period. This individual leg of the sell-off lasted until the 11th, when you got a momentary bounce on that day, The Powell of Jerome gave a speech in a congressional hearing and stated confidently that the Us economy can withstand Fed tightening and the virus surge at that time. And his speech did settle markets for a moment and the panicking stopped. After all, when in the past has Jerome Powell ever been wrong? Then, a few days later, on the 13th, the market stopped believing him, and you got into a much much more severe downtrend that would take you from the 13th all the way down to the 28th of January.

During that time period, analysts dramatically hiked expectations for tightening. You had some more hot inflation reports coming out, and people are starting to expect that March was going to be that first hiking date. Then in the after hours on the 28th, we saw the next attempt at a turnaround. Stocks attempted upward into the ninth, buoyed by the start of an exciting earnings season where many of the companies that actually got bludgeoned in the beginning of the year reported huge beats mostly in tech because the end of 2021 finished off very strong right which caused markets to stabilize a bit and then go up.

But then all of a sudden on February 10th, the fun ended. Again, The next reversal downward started. The January Cpr report came out and Us inflation accelerated to a 40 year high of 7.5 percent. One of the more hawkish members at the Fed, James Bullard, said that he wants to see a full point rate hike by July.

At the time that was considered an outlier, but people were anticipating more and more Fed members starting to switch to hawkish and hawkish and more and more hawkish. During this time period, oil and energy surges as Russia amasses troops at the border between them and Ukraine. Meanwhile, the Fed is still very ambiguous and seemingly indecisive about how they're going to attack inflation and how bad they think it's going to get, which again leaves markets to assuming the worst so you continue getting selling off. Finally, on February 24th, Russia invades Ukraine and the market bottoms at a new low.

You've hit a level that has factored in a lot of uncertainty with the Fed, and also the worst case scenario at that time which would be a Russian invasion of Ukraine for the moment. Markets had been fined to factor in most of their worst fears, and during the period that followed the early days of the invasion, people rushed back into U.s markets. At these levels, Russian rubles got destroyed, sanctions were ruled out, and the global economy was under pressure of accelerating energy prices. You had a mix of opinions.

Some felt that the Fed would be less hawkish considering new threats in Europe. Some felt that the Fed would have to be even more hawkish. Many had felt that the Fed had lost its ability to effectively control this inflation crisis. The sacks of Goldman put a prediction out that the Fed would hike rates 11 times by the end of 2023, and you had this weird momentary sigh of relief where markets had accepted both increased rate hikes and also accepted the early stages of the Ukraine invasion as had already been factored in.

But then on March 3rd, reality started hitting as oil wasn't calming down and ended up starting to skyrocket from 100 a barrel that March beginning to 129 a barrel by March 7th as sanctions increased and Biden banned Russian oil. oil prices at that time end up peaking March 7th and break back below 100 before the much anticipated Fed Fomc meeting on the 15th and 16th. This allows markets to stop focusing on that and start focusing again on the Fed. Then the Fed comes out with some of its biggest announcements on March 16th and provides the first round of clear policy making that we've heard in probably two years.

Market speculation goes down and you start hearing real decisions. The Fed makes the decision to raise rates for the first time by a quarter of a percentage point. They also pencil in six more hikes for 2022 and set expectations for the wind down of their massive balance sheet. This news, while certainly not good for markets, allowed markets to see for the time being, a clear pathway forward and allow them to have a longer term time horizon and likewise, from the start of that Fed meeting to March 29th, the market went on a tear that recovered much of its massive drop During that time period, the market brushed off Russia fears, inflation reports, and overall risk on trading returned.

But week after week of rally set the market up for inevitable weakness as the higher that valuations climb, the more that risk inherently climbs. And then on the 30th, you started seeing a bit of a reversal as speculation and disbelief in the Fed's planned trajectory started going up again. This leads to a sell-off yesterday as we start getting actual words where Fed Governor Bernard, who usually leans traditionally more dovish, says she sees balance sheet reduction soon and at a rapid pace. She also said that the rapid portfolio reductions will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the committee's summary of economic projections.

The increasingly hawkish tone from one of the biggest doves at the Fed let the markets into another round of disbelief and uncertainty over the Fed's trajectory and what they're actually going to do versus what they've said so far that they're going to do. The Fed's anticipated trajectory is literally what allowed the market to build on this massive rally, and now all of a sudden it's being called into question, again, throwing the markets back into limbo. Obviously, the Fed always sets an open-ended tone where they say, oh, we're going to do this or that and then if things get worse, we can do this. but expectations are guided by what they actually do, not what they're open to doing.

Starting with a quarter-point basis hike during a multi-decade high for inflation does not exactly scream a very aggressive strategy or approach. It screams dove. But yesterday's talk from Bernard signaled something completely different. It signaled a completely changing tide of the Fed as a whole, and today we have that confirmed.

You just had the minutes released from that March meeting minutes that revealed that the Central Bank was strongly considering a half point hike instead of the quarter point hike they went with and implying a higher likelihood of substantially higher rate heights in upcoming meetings, perhaps one or more 50 basis point hikes, which means more uncertainty and more volatility Trying to guess where the Fed's going to go with their policy. Pretty much the exact same risk factors that catalyzed the sell-offs from these valuations just a month or two ago. So anyways, we're now caught up to today and the conclusion that you could gander from looking at this trajectory and how the market has reacted to Fed policy and Fed decisions, and what we need to get another round of sustained uptrending is number one. We need the Fed to lay out a nuclear policy proposal and for the market to trust it if the Fed came out tomorrow with a much much more aggressive plan that convinced markets that it would actually bring down inflation over the next 6 to 12 to 18 months depending how aggressive that plan is, the market would almost certainly tank dramatically to factor in the discounting, but at least then the market would have a new low to build off of, similar to how it had a new low last time, the Fed set a clear policy projection.

The problem with the last Fed policy projection is that the markets lost confidence in the ability of the Fed to actually be successful at bringing down inflation. With what it laid out, we need to see a Fed policy proposal that allows markets to factor in very aggressive tightening, but also the ending of massive inflationary pressures which allows markets to start to rebuild from lower levels and start up on a new bull run. As long as the Fed's pathway to get us out of this crisis is marred in uncertainty and consistent reversals and escalations, it makes it harder and harder for people to justify buying back into the market because they're going to know hey, well, just around the corner, the Fed's going to talk again, Which means my whole rally that I just made 40 50 on could get bludgeoned again. At this point, I'm starting to get convinced that the only way that the Fed could really fix this problem and get the market to trust it again is to propose and pencil in something that is just aggressive enough that the market is undeniably convinced that it will bring down a lot of our inflationary problems.

If the market trusts that it can discount whatever that means for the rest of the market and valuations, then the market could start looking past inflation. Of course, I do think that you actually do need to see inflation inflict downward and show some success of the Fed, or at least of natural pressures on the supply chain before you start really seeing a strong super big rally. But if you want to know what is going to fix this crisis, we're in. it's the Fed giving a clear policy projection in the market, factoring that in and then allowing for a new rebound.

A rebound that has derisked enough where people are allowing themselves to look farther and farther out in terms of time horizon. Obviously, the trajectory of inflation is relatively uncertain right now, but if you get some more certainty from the Fed, that shows hey, we're going to preempt the spiraling inflationary pressure that is already out of control, then all of a sudden the market's like, okay, well, that sucks, sell, sell, sell, But at the same time, you get some of the biggest and deepest discounts that we've seen, and you get the ability for it during the cycle to actually see a more inconsistent rebound, which provides not just huge trading opportunities like we saw after the massive 2020 drop, but also some really good deals on some of the highest conviction stocks. And unlike what we're dealing with right now, which is this back and forth tease, all of a sudden, you could set yourself up for a continued uptrend if the Fed and the situation causes a massive recession. Well, most of the time the market factors in the recession ahead of time, and by the time you're in a recession, you get yourself set up for a massive rebound.

Factoring in what's going to happen when you get out of it and then probably eventually also a reversion back down to lower interest rates in the long run. So I don't know folks, it may sound bleak, but I think at the end of the day you need to see something big happen in order for the market to wake up and get out of this funk where it just has to go back and forth forever. You want the market to be looking at a more healthy, long-term projection, not just what's going to happen this quarter or what's gonna happen two quarters from now. Anyways, folks that caps off today's video.

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