The Fed Could 'Pivot' – Higher
Uh-oh, inflation is still sticky... The Fed could pivot – higher... A 6% fed-funds rate is possible this summer... Stocks are still trending up, though... A rare market event, 50 years in the making...
It's the same old song...
A little higher... for a little longer...
I (Corey McLaughlin) am talking, again, about the Federal Reserve's interest-rate plans...
We wrote last Tuesday that Wall Street appeared to be adjusting its expectations a little higher, once again. That's the same thing it had done throughout 2022 as the central bank started hiking its benchmark federal-funds interest rate in an effort to fight 40-year-high inflation.
Inflation and jobs data, we said, had been coming in stronger than the Fed wanted in spots. Ensuing Fed commentary suggested at least consideration for continued rate hikes beyond what investors might have previously imagined. The result, as we wrote Tuesday...
Forget rate cuts.
According to global-markets company CME Group's FedWatch Tool, a majority of bond traders now expect three more 25-basis-point rate hikes from the Fed. And these traders expect the rate-hike environment to last through at least July.
That would put the federal-funds rate near 5.5%. And notably, that's 50 basis points higher than these same traders expected one month ago.
On Friday, the markets digested another big piece of inflation data: the personal consumption expenditures ("PCE") index, which is the Fed's preferred inflation gauge. And, uh-oh, it was higher than Wall Street predictions...
This measure accelerated 0.6% in January, compared with gains of 0.4% and 0.3% the previous two months... The headline year-over-year comparison for January rose 5.4% versus December 2022's 5.3% year-over-year change.
Whatever you may think about these numbers, here's the point...
A generous number of those same Wall Street bond traders we mentioned last week are, a few days later, placing bets on an additional 25-basis-point raise through July. This would bring the fed-funds-rate range closer to 6% this summer.
Those are the highest expectations yet...
I'm not saying that doing this would necessarily be the right or wrong thing for the Fed to do, but be prepared for the likelihood. Said another way, the Fed could finally make its elusive "pivot" – except even higher...
While we're fully aware of how recency bias could steer us wrong, continuing to raise rates is what the central bank did in all of 2022. As if reminding folks that it's still a possibility, Fed Chair Jerome Powell has talked about these rate hikes in most of his public appearances from the past few months.
Throughout 2022, this scenario meant more people waking up to a "higher for longer" interest-rate environment ahead. In response, there were new headwinds for stocks and more concerns that the Fed would ultimately "break something" in the economy before it ever cut rates.
Indeed, that's a good bet again... We don't need to tell you about how much debt is piled up in our economy – both on businesses' balance sheets and in individual budgets. It's hard to imagine this scenario having a clean ending.
We'd certainly stay away from owning shares of overleveraged "zombie" companies that can't even afford to pay the interest on their own debt. If anything, these debt payments could get more expensive before they get cheaper.
From my Fed-watching perch, the backward-looking data the central bank looks at suggests a still-strong economy and record-low unemployment. In economic-theory land, that means there's no reason not to keep raising rates to fight inflation.
Now, here's the good news...
When it comes to what this discussion could mean (or not mean) for stock prices, longtime readers know we like to look at a few simple technical measures of price trends. These include the 200-day moving average (200-DMA) for a long-term trend of a stock, fund, or index.
When we do this, we see that unlike most of 2022, the major U.S. stock indexes have been trading above their long-term trends recently... The benchmark S&P 500 broke above its 200-DMA in January and bounced almost precisely off this average today, up less than 1%.
The same goes for the tech-heavy Nasdaq Composite Index. The Dow Jones Industrial Average is also still trading above its long-term technical trend, and even the small-cap Russell 2000 Index is following suit.
This is all to say, if you're in the camp contending that stocks "bottomed" in October 2022, there's not a ton of technical evidence to suggest anything otherwise... at least not yet. Yet it also means that stocks do have more downside ahead, and those lows from last fall could likely be tested.
Here's an important reminder...
Things can always change, of course. Trends don't last forever.
Around this time last year, we wrote about a battle going on at the 200-DMA in the S&P 500, which had traded stubbornly above this average. Ultimately, the trend turned bearish. Will that happen again in 2023? We can't say for sure...
As our friend and colleague Chris Igou put it very well in today's edition of DailyWealth Trader...
A drunken squirrel might be less sporadic than the investment crowd right now...
In January, investors were bidding up anything and everything. Gold, technology stocks, and bonds were all up.
February has been the exact opposite... The mantra has been "SELL SELL SELL." All of those assets I mentioned above are down.
Nothing about the past few months has been orderly.
The possibility for another leg down (or up) for stocks is on the table...
It's often too simple-minded to say you can attribute market moves to one single data point or fact. But I'm going to do it anyway based on what we've seen over the past 12 to 18 months in the markets. And we're about to hear about it on March 21 and 22.
I'm talking about next month's Fed meeting...
You're probably getting tired of hearing about the next Fed meeting as soon as one wraps up. But March's meeting is special. It's one of the four per year when the Fed will publish its economic outlook and projections for the next 12 months and next few years.
At each of these meetings over the past year-plus, the Fed has generally shown that its expectations for the economy were "a little worse than previously expected." This has taken the form of higher interest-rate projections, higher unemployment, and lower economic growth...
Should the same kind of revisions appear from the Fed in its next round of projections, expect 2022-level volatility.
Now, that doesn't necessarily mean a sell-off is guaranteed...
We've seen intraday swings of 1% several times in the past 12 months – both up and down – as Powell has spoken about economic numbers in his post-meeting press conferences. And lately, the markets have reacted positively to his messaging.
That could certainly happen again next month. Or the market could get walloped with the "higher for longer" story again, or another surprise. Either way, for better and worse, it's on our calendar. Keep your eyes on what the Fed members say and how the market reacts to the news.
One more thing...
We at Stansberry Research have got an exciting free event coming up...
You may have seen a few e-mails about it already, but I want to make sure all Digest readers get the details and invitation.
On Thursday, March 2, our Dan Ferris is going live to explain that a rare market event, 50 years in the making, is approaching...
Dan says it will likely have a huge impact on every asset that people own. We're talking about stocks, bonds, the value of your home, and especially the cash you may have in the bank... If you understand what's coming, this very specific event could help you retire with more money than you thought possible.
On Thursday, Dan – whom you hear from most Fridays in this space – plans to run through exactly how big this setup is.
He's going to talk about the specific catalysts that could play out in the coming weeks... and how the last time we saw something remotely close to this, folks could have made more than 400% on the lowest-risk investment available.
I can't share too much else... But I do want to say that this event, in addition to Dan, will also feature another person I'd never want to miss when it comes to smart investing and the markets... Click here for more information and to sign up for free.
Was Life Better When the Fed Printed Away?
"The Fed over its 100-plus year life span has given us no reason to be confident that they can find a middle ground between easing and tightening," money manager Adrian Day tells our editor-at-large Daniela Cambone. "It's not that the Fed is doing their task badly, which they are, it's just that their task is impossible."
Click here to watch this episode of The Daniela Cambone Show right now. And to catch more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 2/24/23): CBOE Global Markets (CBOE), Comfort Systems USA (FIX), and MYR Group (MYRG).
In today's mailbag, feedback on Dave Lashmet's Thursday Digest and Dan Ferris' Friday essay... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Mr. Lashmet's Digest this past Thursday was very informative and offered essential insights on the importance of space in future wars, satellite technology, LEO satellites with Synthetic Aperture Radar ('SAR') as a part of layered defense to establish resilience and redundancy in the detection, tracking, identification and targeting capabilities of the 'kill chain' of the battle field network; and especially to maintain military deterrence in the East China Sea and the Taiwan Strait, through which transits the majority of annual global trade and the defense of America's regional democratic allies: Japan, South Korea, and Taiwan...
"It is interesting to me that China has built its military in the fastest buildup in history to become the regional hegemonic power, to dismantle our alliances and deny U.S. influence in the entire South Eastern Pacific, and to seize Taiwan to fulfill the China Dream. It has done this primarily by investment in 'asymmetric warfare' weapons such as long range anti-ship missiles to attack U.S. bases in the region and destroy the U.S. Navy carriers with pinpoint accuracy and push them back over 1,000 miles from the Chinese coast beyond the current range of U.S. carrier air craft like the F18 and F35. It has also developed hypersonic missiles that may be one of the most expensive weapon systems ever developed for single use.
"Ironically an invasion of Taiwan will require a huge surface fleet and massive amphibious landing force both of which are conventional armed forces that can be targeted by our own 'asymmetric' weapon systems if we can produce them in sufficient numbers and train the people who would benefit from their deployment...
"I welcome this turn of editorial investment enquiry and line of investigation at Stansberry, which seems to have accompanied the belated recognition of the threat the Chinese Communist Party and the build-up of the [People's Liberation Army] poses to global peace and U.S. interests." – Paid-up subscriber Gerard O.
"John Steinbeck said it succinctly: 'We don't seek advice. We seek corroboration.'" – Paid-up subscriber Herb A.
"Hi Dan, I am a therapist. Here's my advice, for free: Don't assume you know what therapists are 'naive' about. Also, as for the book Quiet... I don't think it falls into the same category as the Badass book, not that I've read that one, but judging from the title. Quiet is not about people who need to change but don't want to. It's about how quiet people often have better ideas than 'non-quiet' people, but usually lose out to the groupthink that is so popular in today's business world, amongst other things." – Paid-up subscriber P.W.
All the best,
Corey McLaughlin
Baltimore, Maryland
February 27, 2023