May 1, 5:00 pm EST

As we discussed yesterday, the interest rate market has been signaling that the Fed made a mistake in December, when it hiked rates one last time, into a stock market that was in a steep decline.

In today’s post-Fed meeting press conference with the Fed Chairman, markets were expecting signals from Jay Powell that they might be looking to take that hike back, if the current subdued inflation levels persisted.  But Powell was reluctant to give much of a leaning toward a cut.  In fact, he said the risks that precipitated their “pause” on the rate path (China and European growth, Brexit risks, and trade negoations), have been largely improving.  He’s right.  He said the economy was solid.  He’s right.

Still, stocks came off sharply into the close.

After today, you have to ask the question:  Can stocks force the hand of the Fed, again?  Remember, stocks fell 8% in just four trading days after the Fed’s December hike – penalizing a tone deaf Fed.  In a market that was already down 9% on the month, the slide was exacerbated by the further Fed tightening. 

That stock fallout soon led to a response from the U.S. Treasury, as Mnuchin called out to major banks and the President’s Working Group on Financial Markets (which includes the Fed) to “assure normal market operations.”  That put a bottom in stocks.  And within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed’s rate path — signaling a pause.  The Fed’s pivot has fueled a V-shaped recovery in stocks.

So, we’ve just come off of a four-month run in stocks that gave us a full recovery of the late 2018 losses — and a new record high in the S&P 500.  That was the best four month gain since 2010.  Now we enter May with this chart …