This Wednesday, the Federal Reserve will announce a possible resumption of interest-rate raises after last month’s pause. Then, Fed Chairman Jerome Powell will hold a press conference, hopefully signaling the future path of monetary policy. It could be the most important financial-market event of 2023.
Of course, the market couldn’t care less. The Dow Jones Industrial Average recently notched 10 consecutive days of gains while the NASDAQ continues to power its way toward fresh highs. This is all occurring even while most economists expect the Fed to raise interest rates on Wednesday, thereby inhibiting lending activity and slowing down the economy.
Remember, it’s complacent stock markets that are the most vulnerable to deep drawdowns. The most startling discrepancy right now is the one between what the market expects and what the Fed clearly stated it will probably do.
It was just last month that Powell warned, “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” In addition, Powell stated that he “wouldn’t take moving consecutive meetings off the table at all.”
In other words, Powell isn’t opposed to imposing two more rate hikes this year, and they could be back-to-back. Yet, the market is choosing not to believe the Fed chairman and has priced in the assumption that there will only be one more rate hike in July, and then a pause for a while, followed by rate cuts next year or even later this year.
The market is also assuming that inflation will just melt away on its own or with the Fed’s help. Sure, the Consumer Price Index is down to 3% annual growth, if you choose to rely on the CPI as your inflation gauge. However, there are signs in the real economy that the prices of essential goods are still growing at a rapid pace.
In addition, there’s typically a lag effect between the end of a rate-hiking cycle and a sharp slowdown in the economy. Historically, the full impact isn’t felt until some months have passed after quantitative tightening has ended.
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Then, there’s the resilient labor market. That’s good news for America’s citizens, but it’s not what Jerome Powell wants to see in 2023. Rather, the Fed chairman would prefer that more people be out of work, so that he can end his series of rate hikes to tame inflation.
Still, although the July and September FOMC meetings will be impactful, there’s no need to veer away from your diversified investment plan (assuming you have one). While interest-rate-sensitive technology stocks are flying too close to the sun, this isn’t the “everything bubble” that some social-media commentators are wringing their hands about.
S&P 500 earnings growth is negative on a year-over-year basis, but who says you have to buy the entire basket of S&P 500 stocks? The idea is to be selective, and choose businesses that demonstrate growth but aren’t overvalued by the market.
There are gold, silver, copper, and uranium miners that fit this description, and they aren’t necessarily members of the S&P 500 (though they could be in the future). Sometimes, the greatest gains can come from outside-the-box thinking and looking where others aren’t.
Meanwhile, if you’re bored of Bitcoin because it’s been stuck near $30,000 for a while, that’s actually a reason to get in since it will shake thrill-seekers out of the trade. They’ll abandon Bitcoin in search of the next shiny metal object, and that’s when assets tend to take the next leg higher.
Or, you can follow in lockstep with the mainstream narrative that the entire stock market will continue to move higher because the Fed will start to cut interest rates soon. That scenario is unlikely but already priced into mega-cap stocks, which to me at least, sounds like a train wreck waiting to happen.
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