A lot has happened since my comment on the stock market (SPY) last week! We weathered the rate hike — 50 basis points, as everyone expected — and I was right that the dotted line and post-meeting commentary would spoil the party. This has certainly been a market where any bad news can shake the market… and that is exactly what we are seeing now. Keep reading for a full update on what’s going on….
(Enjoy this updated version of my weekly commentary published Dec. 19e2022 of the POWR Growth newsletter).
Despite all the reports from Fed Chairman Powell that there is “more work to be done” to fight inflation…
Despite all the warnings from economists and CEOs that a recession is likely in our future…
Despite the massive layoffs and inverted yield curves…
Everyone just realized that next year will be painful. You can see the moment when people came out of the pink haze they were living in.
Since this is an hourly chart, you can really see how the market reacted as traders processed the news.
Including Monday, the S&P 500 (SPY) has sold 5% in the four days since Wednesday’s rate hike. Looks like Powell woke up the bears.
And yes, the Federal Reserve’s latest reality check – more on that shortly – is partly responsible for the decline, but there were other forces at work as well.
But I’m getting ahead of things. Let’s go back to Wednesday, where all these problems started…
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 is the September dot plot (left) next to that of the December 14 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.
Notably, now 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%)… stay at 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.
The market ended the day about 0.6% lower.
That’s a solid drop, but I expected a bigger reaction to the increased hawkishness and reminder that the mission was far from accomplished. However, at this point I am used to the market brushing off these bearish headwinds.
And while the Federal Reserve’s reality check was partly to blame, new forces were also at work.
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. The market reacted accordingly, dropping 2.5% that day.
Friday was more of the same. The S&P 500 fell another 1.1% on news that S&P Global’s services PMI fell to a four-month low, while the manufacturing index hit a 31-month low in December.
We saw another notch lower today, with the S&P 500 (SPY) with a decrease of 0.9%.
This was an extremely bearish period after a historically bullish period. 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.
Even if we end up in a recession, it’s 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 are not necessarily the same ones that worked during the bull market. But here’s something incredible…
Applying POWR ratings to growth stocks has been a consistent winner through bear markets, bull markets, expansions, recessions, and everything in between. This strategy, dating all the way back to 1999, has delivered positive returns every year but two and has beaten the market by double-digit percentage points every year but one.
It’s like nothing I’ve ever seen. And it is a good signal that we need to stay the course. Once we weather the storm and the clouds begin to roll out, we will own a portfolio of growth stocks ready to take off as the leaders in the next bull market.
Those are going to be fun times, y’all!
The bears are awake. But here’s a fun fact: In 2022, the market has had nine other selloffs to rival this four-day 5% drop. And six of those nine times, the market was up about 4% to 6% in the days that followed. Maybe we’ll get that surprise rally from Santa after all!
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Chief Growth Strategist, StockNews
Editor, POWR Growth Newsletter
SPY Stocks. Year-to-date, SPY is down -19.06% 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.