The case for ignoring Jackson Hole

Aug. 25, 2022 1:13 PM ETSPDR S&P 500 Trust ETF (SPY)QQQ, SP500, NDXBy: Kim Khan, SA News Editor30 Comments

FED federal reserve of USA sybol and sign.


All eyes are on the Fed symposium in Jackson Hole, Wyo. but should they be looking further down the road?

Markets are expecting a hawkish message from Fed chief Jay Powell tomorrow. Fed funds futures have tilted to 60% of a 75-basis-point hike next month, while the S&P 500 (SP500) (NYSEARCA:SPY) and Nasdaq 100 (NDX) (QQQ) are down about 1.5% for the week.

But some strategists are skeptical Powell will have much of an impact.

"We expect that any revelations from Jackson Hole commentary will be marginal to the ongoing index vacillation between hard and soft landing expectations," Citi strategist Scott Chronert wrote in a note. "Some incremental hawkishness may be priced in courtesy of the past week’s pullback. To us, the trend points to increasing likelihood of mild recession effects unfolding during the first half of next year."

In a note titled "Jackson Hole, Smackson Hole," Wells Fargo Equity Analyst Chris Harvey noted that the S&P "ricocheted" off the top of its near-term trading range at 4,300 as rates were pulled higher by Fed fears and European inflation.

"In our view, the Jackson Hole takeaway will be in the eye of the beholder: Hawks will focus on hawkish statements (and vice-versa for doves)," Harvey said.

"Equities probably find stability post Jackson Hole, as Fed fears are expected to crest and one (possibly both) of the recent rate drivers eases," he added. "Until then, interest rate trends and liquidity suggest a bit more 'chop.'"

Looking ahead, there is still one more major risk trade coming for 2022 centered around conference season, according to Wells Fargo.

"For short-term traders, we would be neutral heading into the September conference season, but we would be ready to move in a big way," Harvey said. "If we see a spate of negative pre-announcements, we think it is a sloppy tape into year-end as the Bears reassert themselves and it is time to short weakness."

"If we do not see the negative announcements, then we think it's a sprint to 12/31. Currently, the fundamentals appear to be holding up well enough, but we think the better risk/reward is not to predict, but to react."

Citi has a target of 4,200 for the first half of 2023. That is banded at 3,650 on the downside for a mild recession and 4,700 on the top end in the case of a soft landing.

"Thus, we expect the S&P 500 to vacillate over the coming months as incremental data points infer higher or lower probabilities to recession vs soft landing," Chronert said.

Now read argument for being laser-focused on Jackson Hole.

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