For the first time in a long time, the Fed did almost exactly what investors thought with their 7/26 announcement. Beyond the expected quarter point rate hike was the start of a “dovish tilt” in their language that paves the way to end of the rate hike cycle.
So stocks exploded higher right?
Not exactly. Let’s break it all down in this week’s commentary below...
Market Commentary
This is one of the simpler Fed announcements to break down. They did exactly what was expected. That starts with a 25 point rate hike followed by what appears to be a dovish tilt in the language used by the Fed.
Here is the key statement from Powell at the press conference:
"The staff [economists from the central bank] now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.
My base case is that we will be able to achieve inflation moving back to our target without the kind of really significant downturn that results in high levels of job losses that we've seen in some past, many past instances.
The Federal Funds Rate is at a restrictive level now, so if we see inflation coming down, credibly, sustainably, then we don't need to be at a restrictive level anymore... You'd stop raising [rates] long before you got to 2% inflation and you'd start cutting before you got to 2% inflation, too."
Boiling it all down this could very well be the last rate hike followed by a pause for one or more meetings. If the data says that we are on the right path back towards 2% inflation, then they could start the process of lowering rates from their current perch (which is the highest level in over 20 years).
This sounds like a reason to celebrate...and yet on Thursday stocks had one of their biggest one day selloffs in quite a while.
Why?
Some commentators point to GDP at +2.4% on Thursday being a bit hotter than expected. If that heats up further it would likely keep inflation higher than the Fed would like leading to another quarter point rate hike. (Odds currently point to a 33% chance of that happening by years end).
Or a simpler explanation, and likely more accurate reason is to simply say, “buy the rumor, sell the news”.
Meaning that many investors place their bets in anticipation of future events. And then sweep those profits off the table as things go according to plan.
At this stage the healthiest thing that could happen for this bull market is that the S&P 500 consolidate under 4,600 for the S&P 500 (SPY). We have run very far...very fast. And now is the perfect time to have a “pause that refreshes”.
Part of that refresh cycle would see more profits trimmed from overripe mega caps and rotated to deserving small and mid cap stocks.
What makes them deserving?
The healthiest fundamentals as likely proven by the Q2 earnings report. Plus the 118 point inspection that comes from our proven POWR Ratings model. That creates the perfect transition to the next section...
What To Do Next?
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Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares were trading at $456.92 per share on Friday afternoon, up $4.43 (+0.98%). Year-to-date, SPY has gained 20.38%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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