Reading between the lines of the latest FOMC statement

The big news this week came from the Fed, with a pause in the rate hike cycle and hawkish talk from the FOMC (higher rates ahead). However, after a brief pullback in equities, the S&P 500 (SPY) and other markets returned higher. We’ll get to that in a moment, but the good news for us is that the uptrend can only help our portfolio. Despite the uncorrelated nature of some of our smaller holdings (by market capitalization), a rising tide tends to lift all boats. Read on to find out moreā€¦.

(Please enjoy this updated version of my weekly commentary originally posted on June 15e in the POWR Stocks Under $10 newsletter).

As expected, the Fed decided not to raise rates at the June FOMC meeting. This follows an expected larger drop in the CPI. The popular measure of inflation came in at 4%, down significantly from 4.9% the previous month.

The apparent easing of inflation may be one of the reasons the Fed was comfortable not raising rates this time around.

However, the FOMC has not been shy about being hawkish with its language. There is almost a 70% chance of a quarter point rate hike in July. Moreover, the central bank has made it clear that it still has a lot of work to do before arriving at its preferred inflation figure.

Nonetheless, the Fed’s warnings made little difference to the stock market. After a brief pullback in major indexes, stocks rebounded at the end of Fed Day. And on Thursday, the S&P 500 (SPY) climbed another 1.2%.

You can see in the chart above, the SPX (S&P 500 Index) is clearly above the upper barrier by two standard deviations.

Volatility has increased a little, so the breakout is a little less glaring than it would have been a week ago. That being said, I would expect a medium reversion next week as the buying subsides.

That’s not to say stocks won’t continue to rise on average. In fact, at this point, I’d be surprised by any significant sales for the next month or so.

Yet, as I often say, mean reversion is a reality, and at some point the market will return to its mean price.

Meanwhile, the economy continues to falter. Retail sales also beat expectations this week (up 0.3% in May) as consumers continue to shop despite above-normal inflation.

The Fed has an interesting situation on its hands. Do they want to take the risk of torpedoing the economy? Or should they focus primarily on reducing inflation?

We’ll see how things play out, but I would expect a few more rate increases this year before we’re able to hold steady (and possibly see lower rates). We could be stuck with higher rates for another year or so at this rate.

Volatility rose a bit ahead of the Fed announcement, but fell back below 15 on Thursday. All signs point to a persistent low volatility regime for the summer trading months. You can see VIX stock in the chart below.

Apart from some unexpected news, I wouldn’t expect any significant rise in the VIX level until we approach the July FOMC meeting.

Keep in mind that the 4th of July holiday is the main travel season and there probably won’t be much volatility around this time.

What to do next?

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All my wishes!

Jay Soloff
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares closed at $439.46 on Friday, down -$3.14 (-0.71%). Year-to-date, SPY has gained 15.35%, versus a % rise in the benchmark S&P 500 over the same period.

About the Author: Jay Soloff

Jay is the Principal Options Portfolio Manager at Investors Alley. He is the publisher of Options Floor Trader PRO, an investment consultancy that offers you professional options trading strategies. Jay was previously a professional market maker on the CBOE floor and has been trading options for over two decades.


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