(Please enjoy this updated version of my weekly commentary from the POWR Growth newsletter).
Every 3 months, the Fed releases its Summary of Economic Projections (SEP) which is basically a survey that Committee members fill out that gives their assessments of where inflation, interest rates, and growth will be in the future.
Given recent spikes in inflation and economic improvements, it’s not exactly surprising that many on the FOMC committee decided to increase forecasts for these measures.
Of course, the major takeaway is that the FOMC now expects two rate hikes in 2023. This corresponds to the Fed beginning the tapering of its asset purchases sometime within the next six to twelve months.
This is certainly a marginal tightening of monetary policy given that the previous SEP didn’t have any rate hikes till after 2023.
While this is leading to a burst in short-term volatility, I don’t think it’s a big deal. This tightening should be expected given the significant improvements that have taken place over the past year.
In fact, the Fed is still quite dovish given that such little has changed in terms of its policy despite coronavirus case counts plummeting, the stock market at all-time highs, and second-half GDP expected to be above 5% this year.
One useful metaphor –> the Fed’s support is the equivalent of training wheels for the economy. Once, the economy’s rebound starts to become self-sustaining, the training wheels need to come off. But this process needs to be managed at the correct pace.
Doing it too soon could lead to a nasty crash. Doing it too late can result in even bigger problems in terms of financial instability.
While, the Fed made some headlines, I don’t think there was anything meaningful enough to affect our market outlook.
We remain confined in a choppy, market environment. In fact, the S&P 500 has gone 18 trading sessions with less than a 1% move on a closing basis.
On a top-down level, the market is quite strong as it’s less than 1% from all-time highs. However, from a bottom-up perspective, I continue to see price action within individual stocks that is more consistent with a market rotation rather than a market on the verge of breaking out.
At some point, these choppy conditions will evolve into a trending move higher or lower. Odds favor higher given that we are in a bull market with an improving economy and increasing earnings.
However, I remain open to the idea that we could see another shakeout before a move higher… and this scenario is also consistent with the tendency to see a nasty, sell-off in year two of a bull market.
This remains a challenging and frustrated market belied by the diminished volatility in indices.
Since mid-February, we have experienced rolling corrections in many parts of the market with the heaviest selling in growth stocks. Fortunately, we have avoided the worst of it.
In fact, we remain in the green with a modest 2% gain as of Wednesday’s close.
I remain quite content with our positioning and exposure. If the market does turn higher, we are in positions that will outperform, with the flexibility to increase exposure.
And, if the market’s breakout attempt turns out to be a bull trap, then we are also in position to navigate that situation.
Currently, the latter scenario seems more likely given the strength in the indices. Additionally, based on past experience, I’ve learned to always respect the market’s price action.
However, my gut tells me that we need one more shakeout before the market can meaningfully start to trend higher.
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All the Best!
Chief Growth Strategist, StockNews
Editor, POWR Growth Newsletter
SPY shares were trading at $422.55 per share on Thursday afternoon, up $0.44 (+0.10%). Year-to-date, SPY has gained 13.39%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles.How the Fed’s Pivot on Rate Hikes Will Impact the Stock Market appeared first on StockNews.com