In last week’s commentary, I said, “It feels like the S&P 500 (SPY) wants to be bullish, but everyone is extremely anxious…like we’re collectively holding our breath, waiting for the next shoe to drop.” Well, it did, and hard, with the broader indices falling significantly on Thursday as everyone finally put together the latest pieces of the market puzzle. Keep reading to find out what the image shows us.
(Enjoy this updated version of my weekly commentary originally published Dec. 15e2022 in the POWR Shares Under $10 Newsletter).
The S&P 500 (SPY) plunged 2.5% on Thursday as traders realized next year is going to be painful.
Yes, the Federal Reserve’s latest reality check – more on that shortly – is partly responsible for the decline, but other forces were at work as well.
But I’m getting ahead of things. Let’s go back to where all these problems started…
As I predicted in my last commentary, Fed officials voted to raise rates another 50 basis points. Very well! A smaller walk. But then we got the final dot plot and an updated commentary from Powell… and both reiterated that the war on inflation is far from over.
First the dot plot.
The Fed’s “dot plot” is actually a visual aid that shows where each of the Fed officials thinks short-, medium-, and long-term interest rates will be. Here’s September’s dot plot (left) next to that of yesterday’s meeting (right).
The dots make it crystal clear: some Fed officials now think we should raise rates even further… and keep them high for longer.
When the Fed last released these projections in September, they projected Fed Funds rates to peak between 4.75% and 5.0% sometime in 2023, before slowly declining again over the next several years.
Now, in particular, we have more aggressive forecasts for rates of 5.1% to 5.4% in 2023 (with some Fed officials forecasting rates as high as 5.5% to 5.75%) … which will be above 2024 the 4% … and then maybe fall further in 2025 .
(Also, I’d like to know who the one super hawk is, with interest rates ranging from 5.5% to 5.75% UNTIL 2025. In bold.)
Powell’s comments give words to the message outlined by the image: there is more work to be done. A few quotes from his press conference after the meeting…
“I would say today in our judgment that we are not yet in a sufficiently restrictive policy stance, and so we say we expect continued increases to be appropriate.”
“Historical experience strongly warns against premature easing of policy. I wouldn’t see us considering interest rate cuts until the committee is confident that inflation is sustainably coming down to 2%.”
In other words, the Fed is keeping its foot on the gas and not giving up until the job is done.
Yes, this definitely contributed to the sell-off we saw… but as I mentioned above, it wasn’t the only factor.
On Thursday, both the European Central Bank and the Bank of England announced their own rate hikes, along with reports that further tightening is likely.
Finally, the US retail sales report showed spending fell in November – not a promising start to the holiday season.
Powell keeps saying there is still a chance of a “soft landing” where we can successfully navigate inflation without triggering a recession, but that seems less and less likely.
And if we do end up in a recession, it is certainly not the end of the world. Stocks have always made up for recession losses over time and I don’t expect that to change now.
Does the road get bumpy? Yes.
But those bumps don’t mean we should panic. It just means we have to be nimble. The strategies that perform better in the future will probably not be the same as what worked during the bull market. But here’s something incredible…
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Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10
SPY shares closed Friday at $383.27, down $6.36 (-1.63%). Year-to-date, SPY is down -18.37% versus a percentage increase in the benchmark S&P 500 index over the same period.
About the author: Meredith Margrave
Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth and POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.
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