In last week’s comment, I said, “The S&P 500 (SPY) seems to need to be bullish, but everyone may be very anxious… as if we’re collectively holding our breath waiting for the next shoe to drop.” Well, it did, and it did, and the broader indices dropped significantly on Thursday as everyone finally put together the latest pieces of the market puzzle. Read on to seek out out what this photo represents.
Shutterstock.com – Stock Market News
(Please use this updated version of my weekly commentary originally posted on December fifteenthp2022 in POWR Newsletter Shares under $10).
Market Commentary
S&P 500 (SPY) fell 2.5% on Thursday as investors realized next yr was going to be a painful one.
Yes, the Federal Reserve’s latest reality check – more on that soon – is partly liable for the decline, but there have been other forces involved as well.
But I’m going ahead. Let’s return to where all this trouble began…
As I predicted in my last comment, Fed officials voted to lift rates of interest by one other 50 basis points. Excellent! Less climbing. But then we got the latest scatter chart and updated commentary from Powell… and each reiterated that the war on inflation is removed from over.
First, a dot plot.
The Fed’s “dot plan” is essentially a visible tool that shows how each Fed official believes rates of interest will develop over the short, medium and long run. Here is the September scatter chart (left) next to yesterday’s meeting chart (right).
The dots make every little thing as clear as day: many Fed officials now imagine we could have to lift rates of interest even higher… and hold them longer.
When the Fed last released these projections in September, they projected the federal funds rate to peak between 4.75% and 5.0% sometime in 2023 before slowly declining in subsequent years.
We currently have rather more hawkish forecasts for rates of 5.1% to five.4% in 2023 (some Fed officials are predicting rates as high as 5.5% to five.75%)… it should stay above 4% throughout 2024. …after which it could go down in 2025.
(Also, I’d prefer to know who the super hawk is, predicting rates of interest of 5.5% to five.75% BY 2025. Daring.)
Powell’s comments reinforce the message painted by the visuals – there’s still an extended solution to go. A couple of chosen quotes from the press conference after the meeting…
“I’d say that today we assess that we will not be yet in a sufficiently restrictive policy stance, so we are saying that we might expect the ongoing hikes to be appropriate.”
“Historical experience strongly warns against premature easing of policy. I would not imagine us considering rate cuts until the committee is confident that inflation is right down to 2%. in a everlasting way”.
In other words, the Fed has its foot on the gas and won’t let go until the job is finished.
Yes, that definitely contributed to the sell-off we were seeing… but as I discussed at the starting, it wasn’t the only factor.
On Thursday, each the European Central Bank and the Bank of England issued their very own rate hikes together with messages that further monetary policy tightening was likely.
Finally, the US Retail Sales Report showed that spending fell in November – an unpromising begin to the holiday season.
Powell reiterates that there continues to be a probability for a “soft landing” where we manage to administer inflation without triggering a recession, but that seems increasingly unlikely.
And if we fall right into a recession, it’s definitely not the end of the world. Stocks have at all times recovered from recessions over time, and I do not expect that to alter now.
Will the road be bumpy? Yes.
But these upheavals don’t mean we must always panic. It just means we’ve got to be agile. Strategies that can outperform in the future will likely not be the same as those who worked during the bull market. But here’s something amazing…
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Comfortable birthday!
Margrave Meredtih
Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10
SPY shares closed at $383.27 on Friday, down -$6.36 (-1.63%). 12 months to this point, the SPY is down -18.37% in comparison with the percentage gain of the S&P 500 index over the same period.
About the Creator: Meredith Margrave
Meredith Margrave has been a renowned financial expert and market commentator for the last 20 years. He’s currently the editor of POWR increase and POWR shares below $10 newsletters. Learn more about Meredith’s past, with links to her latest articles.
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