The Fed was not kidding when they said “higher rates for longer”. That was reiterated with extra vigor on Wednesday....and investors were not pleased.
Does this change the bullish thesis? Or is this just a little detour south before the next leg north?
We will break it all down in today’s commentary.
Market Commentary
Here is the nutshell of the Wednesday Fed announcement.
The economy is doing better than we expected...so it’s going to take a bit longer to bring down inflation to target level...the good news is that we really believe we can do it without creating a recession.
So why did stocks go down on this seemingly positive outlook?
Because the dot plot of rate expectations by Fed officials now has the end of 2024 rate still way up at 5.1%. That was revised higher from the previous estimate of 4.6%.
Yes, this most certainly fits in with the Fed narrative of “higher rates for longer”, but much longer and higher than investors previously anticipated.
This notion of longer Fed involvement increases odds of overstaying their welcome creating a recession. Also it delays when rates are lowered which would be a catalyst for higher economic growth which begets higher earnings growth and higher stock prices.
Granted this update is not overly positive. But it’s not really negative either.
That’s because when you pull back and assess the big picture it still says that the odds of recession (and return to bear market) are very low. This is reinforced by Fed officials who now predict +1.5% GDP growth in 2024 up from previous projection of +1.1%.
To boil this all down...things are still bullish because odds of recession are so low. But the idea of when the Fed starts lowering rates to boost the economy and stock prices is also postponed.
Instead, I see slower earnings growth begetting more modest stock price increases for the overall market. For example, the S&P 500 (SPY) may only go up 5-10% next year. Not terrible...not exciting either.
But that 5-10% is the return for the average stock. Our goal is to invest in BETTER THAN AVERAGE stocks. Or to be totally honest, we want GREAT stocks.
Gladly that is easy to do thanks to our reliance on the consistent outperformance of the POWR Ratings. Focusing on the fundamentally most sound and reasonably priced stocks has always been a path to better returns.
In fact, historically many of my years of superior outperformance over the market is precisely this situation. Where superior stock selection handily beats mundane results for overall market.
So I welcome this chapter where every dip is just another opportunity to snap up the best stocks at even better prices.
How low could this recent dip go?
Moving Averages: 50 Day (yellow), 100 Day (orange), 200 Day (red)
We are enduring our first real test of the 100 day moving average (4,375) in quite some time as we broke below on Thursday. Maybe bounce back Friday...maybe take a real shot at scaring investors with a test down to the 200 day moving average at 4,189.
That would represent a stiff 10% correction for the overall market that could levy 50-100% more pain on riskier positions.
Honestly, I would welcome that move in the short run...because I know it would not be long lived. Also as a value investor I think that it would be fun to see all the overpriced glory stocks, that led the way the first half of the year, get their proper comeuppance now.
As shared earlier, I still see us in the midst of a long term bull market. However, investors were a bit too overzealous about when the Fed was going to lower rates...and thus a necessary pullback/correction is unfolding.
Maybe bottom is now at the 100 day moving average...but likely no worse than down at the 200 day moving average. Yet all that will truly do is get rid of recent excesses making it all the easier for the overall market to move higher by end of the year and into 2024.
Again, the key to outperformance is going to be superior stock selection. The next section will share with you some important insights on that front...
What To Do Next?
Discover my current portfolio of 7 stocks packed to the brim with the outperforming benefits found in our POWR Ratings model.
Plus I have added 4 ETFs that are all in sectors well positioned to outpace the market in the weeks and months ahead.
This is all based on my 43 years of investing experience seeing bull markets...bear markets...and everything between.
If you are curious to learn more, and want to see these 11 hand selected trades, then please click the link below to get started now.
Steve Reitmeister’s Trading Plan & Top Picks >
Wishing you a world of investment success!
SPY shares rose $0.10 (+0.02%) in after-hours trading Thursday. Year-to-date, SPY has gained 14.05%, 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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