WEDNESDAY WEALTH RECAP
- Anyone can make a good call from time to time. But Alexander Green reminds readers that no one can consistently and accurately time the market.
- Even though the plot of financial bubbles is remarkably predictable, Nicholas Vardy states that even the most brilliant people in the world can fall for their trap.
- Chief Income Strategist Marc Lichtenfeld notes that the element most crucial to investing success is not stock-picking ability – it’s time.
Editor’s Note: Please be sure to read Matt Benjamin’s message below ahead of today’s Fed announcement.
As Matt explains, the outcome may provide some exciting investment opportunities.
While we wait to see how the meeting details unfold, you can get started with Alexander Green’s four breakout “buy now” stocks that are destined to lead to massive growth in the years to come.
Yes, as Matt details today, we’re seeing the highest inflation rate in decades and declining consumer confidence…
But according to Alex, a series of events is coming that will lead to more wealth creation in the next two years than in the past two decades combined.
– Nicole Labra, Senior Managing Editor
It’s an understatement to say that all eyes are on the Federal Reserve today.
The central bank’s interest rate setting committee announcement at 2 p.m. ET today is probably the most anxiously anticipated Fed decision in a decade.
Nobody can say for sure exactly what the Fed will do.
That’s because the road signs – from companies, the economy and markets – are pointing every which way at the moment.
For example, unemployment is at 3.6% – a hair above a 50-year low – and expectations for second quarter corporate earnings coming in now are higher than they were six months ago.
Yet the yield curve – as measured by the difference between the 2-year and 10-year Treasury yields – is now inverted. Historically, that’s been a reliable signal that a recession is coming.
Not to mention, consumer confidence tumbled in June, which indicates that Americans may begin closing their wallets and pocketbooks in expectation of an economic slowdown.
Oh, and “Dr. Copper,” whose price is always a good indication of the near future, is down nearly a third from its March high. The price of crude oil is down almost 20% from early June.
A Guiding Light
In markets like these – when no one knows which way is up – investors often look to the Fed to guide their decisions.
So Chairman Jerome Powell and Co. are, at the moment, the guiding light for many. Investors figure that the Fed has more insight into the economy and markets than any other institution.
That may or may not be true (and might cause some of you to smirk cynically!).
But what certainly is true is that the Fed is so powerful that it can stimulate the economy, create a recession or step in to put a floor under falling asset prices.
It all depends on how the central bank adjusts its target interest rate, the federal funds rate.
That rate impacts all other bond yields and lending rates, from Treasury yields to car loans and mortgages.
And the rate – and how rapidly the Fed adjusts it – also has a huge impact on the stock market.
Just recall what happened in mid-June when the market tumbled to a new low on fears the Fed would become more aggressive with rate hikes.
Thus it’s important to watch the Fed very, very carefully today.
So what can we expect both today and moving forward from this critical institution?
Well, one way to determine that is to watch the federal funds futures market. That’s where interest rate futures traders make bets on how and when the central bank will adjust the federal funds rate.
So What Will the Fed Do?
Right now, the federal funds futures market sees a 78% chance of a 75-basis-point hike today and about a 22% chance of a 100-basis-point hike. (A basis point is one one-hundredth of a percentage point, so 75 basis points is 0.75 percentage points.)
Expectations of a 100-basis-point hike have been coming down in recent days as futures markets and the broader investor universe are beginning to think the Fed will not be as aggressive in hiking rates this year as it seemed just weeks ago.
If the Fed defies market expectations this afternoon and hikes a full percentage point, we should expect to see the market decline again as investors and asset prices adjust to a more hawkish approach than expected.
Going forward, the futures market sees a 50% chance of another 50-basis-point hike at the following meeting, in September (with smaller likelihoods of larger or smaller hikes), and another 50-basis-point hike in November.
Interestingly, that will be the end of the hiking cycle, according to futures traders.
The target rate will peak as soon as November of this year at 3.5%.
And then the Fed will start lowering rates by June 2023.
The good news for investors is that they may not have to wait for the Fed to reverse direction and start easing rates for the market to find a bottom and turn up again.
Rate Hike Cycles and Stocks
For the last eight rate hike cycles by the Fed, the S&P 500 Index was higher one year after the initial rate hike, according to LPL Financial.
The first rate hike by the Fed in the current cycle was on March 16, 2022. At that time, the S&P 500 was at 4,358. To regain that level and keep the streak alive, the index would have to rise about 10% over the next eight months.
And it’s up almost 7% since it hit a cycle low in mid-June.
If the federal funds futures market is right, this may be the buying opportunity investors have been waiting for.