business

Trading Opportunities: Hang in there with this upside down market


It hasn’t been easy for a few weeks – or months. Or years.

This week, as expected, the Federal Reserve raised the key rate by 0.75% as it continued its fight against inflation.

The knee-jerk reaction has been bearish, but historically an initial negative reaction to the Fed is usually reversed in the short term.

The Fed has some problems with its fight against inflation; in addition to raising interest rates, increasing supply would also reduce inflation. However, the Fed cannot control supply chain issues or slowing economies outside the US, which we believe is a bigger cause of inflation than low interest rates.

For instance, Ford Motor Co. (F) fell 12% on Tuesday as management warned that supply constraints (and rising costs) would hurt earnings more than expected.

“I suppose it’s tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” – Abraham Maslow

The economy faces many problems, but the Fed has only one hammer (rate hike). And unfortunately, there are enough aggravating factors to make this repair job difficult (or impossible) to fix by simply raising the rates.

We make this point to explain why the Fed is unlikely to stop raising rates anytime soon. If prices rise because energy prices are high – and housing, consumer goods, workers and cars are scarce – the Fed will continue to use the only tool it has in the hope that ‘it indirectly helps to correct some of these other problems.

So while we don’t think we’ll see any deeper lows in the fourth quarter, we think the upside is also limited as the Fed continues to raise rates. In our view, the S&P 500 should continue to trade between 3,700 and 4,200 until there is a fundamental improvement in the inflation outlook.


WATCH: 32 consecutive winners in 2022 and to come

If you’re worried about running out of money in retirement or not having enough to retire in the first place…

A former money manager shows you how a simple trade can earn you instant cash payouts of up to $1,290…$1,525…and $1,795 IN ONE DAY.

All for just $7.

Click here for everything you need to know.


What the Fed did on Wednesday

In addition to raising the key rate by 0.75%, the Fed also released its economic estimates, which include expectations for interest rates and economic growth.

The Fed raised its inflation (4.5%) and overnight interest rate (4.4%) expectations from what it announced in June. Based on our available numbers, the overnight rate would likely rise another 0.75% in November, which could be a drag on large retail’s fourth quarter.

The Fed’s message in expectations is that it will push interest rates higher for longer to fight inflation. Additionally, they expect unemployment to rise to 4.4% by 2023 from the current level of 3.7%. So while the Fed still forecasts positive GDP growth in 2022 and 2023, the underlying fundamentals are likely to deteriorate.

Two things to remember

1. First, Fed projections are rarely accurate.

This is not a criticism; it’s a reminder that what they think will happen a year in the future is about as accurate as anyone else rolling the dice. It could be worse… or it could be better. This means that we must remain flexible in our strategy as events unfold over the next quarter.

2. Second, even though the Fed expects to keep raising rates, it doesn’t. have

It’s true; they may change course to increase them faster or even start cutting, which happened in 2019. We don’t think they will change course immediately, but you shouldn’t assume they’re stuck in a specific action plan.

The essential

It usually takes traders a few days to digest the Fed report.

We can say with more confidence that the dollar should not weaken much while the Fed raises rates. This should boost consumer spending, but could weigh on the tech sector.

A strong dollar is not an argument for a sharp decline in the fourth quarter, but it should help explain why we think the market upside is limited. A stronger dollar reduces profits made internationally.

Because half of the profits earned by S&P 500 companies come from international sources, this will put pressure on large-cap stocks.

We’ll be keeping an eye on this space and updating you as things progress.

Hang on.

Cheers,

John and Wade

InvestorPlace

Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.
Back to top button