The “apparent” rally after the Fed meeting for the S&P 500 is certainly a headache. Indeed, as we dig below the surface, the overall market hasn’t quite recovered…just the usual suspects in the mega cap space. When you dissect the Fed’s statements, there is a big gap in interpretation. A rational. And a crazy borderline. To make sense of it all, 43-year investment veteran Steve Reitmeister shares the market outlook and updated trading plan below….
There are only 2 possible ways to interpret Wednesday’s Fed statements.
First, take the Fed at its word that probably 2 more hikes are coming and unemployment will rise because of these efforts.
Second, suppose they bluff and are done with the rate hike cycle.
Now let me ask you… Does President Powell look like the bluffer type? Or does he look like an Eagle Scout who has spoken the truth every time his mouth has opened since he was born???
I hope the answer is obvious enough. The Fed is not bluffing. Which explains why the CME’s FedWatch tool rose to show a 74% probability of a rate hike at their next meeting in late July.
Specifically, the Fed has always said that high inflation is an economic disease that hurts long-term growth and jobs. Thus, their objective is to eradicate it completely and return to an annual inflation target of 2%.
Their method of eradicating it is to “drop in demand“by slowing the economy. It’s hard to drive down demand if you have full employment and everyone’s pocketbooks are full.
That’s why, time and time again, Powell’s press conference talks about the employment situation being too strong, leading to persistent wage inflation.
Adding these concepts together, it is clear that they will keep the rates high until they have actually caused an increase in unemployment. This is why they are still anticipating a 1% increase in the unemployment rate before all is said and done.
Now let me put it another way.
They WANT unemployment to rise to put a final nail in the coffin of high inflation. That’s why so many commentators say they’ll keep rates high until “something breaks“.
That’s why you should take their word for it that…
- There is still work to be done to control inflation
- 2 more rate hikes are likely in the forecast this year
- Lower rates will NOT happen in 2023
- And yes, unemployment will increase by 1%…or more!
This is the real revival folks.
The unemployment rate never rose 1% and stopped there. Research shows that once you increase that much, it usually leads to an increase of 2% or more. Sort of like opening Pandora’s box that greatly increases the chances of a future recession (and a deeper bear market).
Do you feel lucky, punk?
To market bulls, I repeat Dirty Harry’s blank question “Are you feeling lucky, punk?”
In this infamous scene, Dirty Harry (Clint Eastwood) fires multiple shots to apprehend a fleeing criminal. And now he stands above him with a gun pointed to his head with one of the greatest monologues of all time.
That being in the whole flurry of activity, Harry isn’t sure if he fired 5 times or the full 6 in the gun. So, he asks the guy if he feels lucky knowing if the gun is empty and he should try to flee the scene. Of course, the criminal was right to surrender because the risk of having his head blown off was far too high.
Yes, the Fed has thrown many rate hike balls at the economy. So when they tell you they’re probably going to shoot twice more…and that’s probably going to lead to higher unemployment…and history shows that goes hand in hand with recession…and recessions will hand in hand with declining stock prices … THEN it feels “crazy straight jacketto keep buying stocks right now.
Another rally that wasn’t a rally
On the face of it, it does appear that investors interpreted the Fed meeting as a green flag for the bull market. Yet, digging deeper, we find that it was just more of the same madness as earlier this year. All the money goes to the usual suspects in the Mega Cap space.
That’s why the Bond King, Jeffrey Gundlach, said on CNBC that we’re seeing a manic-style bubble in mega-caps because of the excitement around AI. But given the current valuation of the overall stock market, these bonds are the much better value right now given the tremendous rise in yields. And yes, that stock prices should fall. His analysis is absolutely, historically, objectively true.
So, as we dig below the surface, we see that mid and small caps are actually down since the Fed’s announcement on Wednesday afternoon. Not rallying with the mega cap dominated by the S&P 500.
Which means there is NO scale…and therefore not much real substance to the rally. With that in mind, now take a look at this Friday chart of the best performing sectors:
Look at the 4 main sectors. They are defensive groups, which means risk-free market conditions. Not the bull market that is over-hyped in media circles.
Can stocks continue to rally in light of these facts?
Unfortunately yes. It is the very nature of fads and bubbles that recalls the famous quote of legendary economist John Maynard Keynes:
“Markets can stay irrational longer than you can stay solvent.”
Trading plan
Considering all of the above, this is why my trading plan continues to be balanced. As in 50% invested.
This is the best way to ride the bearish fundamental outlook against the bullish price action. (Still, as noted above, the price action isn’t as bullish as it looks given that there aren’t enough stocks that really participate in the good times… just the usual suspects in the mega cap space).
This balanced posture allows us to move further downside if a recession occurs, prompting investors to seriously press the SELL BUTTON.
And yes, we can still move higher if the fundamental situation improves, allowing stock market gains to spread to more groups.
Heck, Powell might be the greatest poker player on the planet and the Fed might be done raising rates. But with that gun pointed at my head… I’ll take his word for it, there’s more bullets to fire.
What to do next?
Discover my balanced portfolio approach for uncertain times.
It is perfectly constructed to help you participate in the current market environment while adjusting more bullish or bearish as needed in the days ahead.
If you are curious to learn more and would like to see the hand-picked trades in my portfolio, please click on the link below to find out what 43 years of investment experience can do for you.
Steve Reitmeister’s Trading Plan and Top Picks >
I wish 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 up $0.14 (+0.03%) in after-hours trading on Friday. Year-to-date, SPY has gained 15.35%, versus a % rise in the benchmark S&P 500 over 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 company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, plus links to his most recent articles and stock picks.
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