I joined Senior Strategist Roger Scott for this week’s episode of The Big Picture to discuss how we’re playing this week’s interest rate hike after Wednesday’s Federal Open Market Committee meeting.
The key to what happens after the hike rests on what Fed Chair Jerome Powell says after… Will he still be super hawkish, looking to dole out more pain like he has been all year? Or will he finally pull back a bit?
Looking back to the last FOMC meeting in September, Powell used the word “pain” over and over and over again. He’s been trying to create a sell-off… He wants stocks lower and the market subdued, and the Fed is actively working against any kind of sustained rally.
That said, I think he’s going to pull back some on this “pain” rhetoric. Goldman Sachs, whose research I respect, said it expects rates to hit 5.0% in 2023, and stay there for a while. As you can see in the chart above, a 0.75% hike now would put us in the range of 3.75% to 4%, so we’re getting close to a stopping point — I hope.
So that indicates that after this likely 0.75% hike, we have another 100 basis points to go, and I’m not sure how they’d slice that up heading into next year.
But if you look at the two-year Treasury yield, it’s come down a lot, and that tells me the bond market has gotten a little ahead of itself in thinking the Fed is going to slow down or even roll rates back a bit.
Inflation took a while to get going. Meanwhile, monetary policy stayed too loose for too long while the Fed kept buying bonds. That created a monster… a cruise liner that you can’t just stop and turn around like it’s a car.
And so the Fed thinks the only way to fix things is by crushing the stock market. But the reality is it’s only hurting the economy more by the central bank being so set in its ways, throwing the baby out with the bathwater.
The Big Picture: How I’m Playing This Week’s FOMC Meeting
Here are two scenarios I see as most likely…
If the Fed raises 0.75% this week and is a little more dovish — not saying “pain” 100 times — and indicates it could go 0.50% higher next time… I’m buying the dip that could immediately follow the rate hike.
If he is indeed more dovish, I could see the Dow ending positive on the year, the Nasdaq ripping 10% higher, and the S&P 500 could go 15% higher by year’s end…
However, if we continue to get Consumer Price Index prints that are 0.5% higher month over month, that would give the Fed the leeway to do another 0.75% hike at a future meeting — which would wipe out the potential gains I just mentioned above.
Enough about the Fed… let’s get to the good stuff… what I’m looking to trade — what I see as low-hanging fruit. Check out The Big Picture up top and I’ll cover that and much more. Roger also has a few juicy things he’s looking at for trading opportunities.*
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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