The markets are still in a holding pattern as investors expect the Federal Reserve to do another interest rate hike on Wednesday (the fastest rate-raising cycle in 40 years) and pause until the end of 2023. According to Cleveland Fed President Loretta Mester last April 20, 2023, "We are closer to the end of the tightening journey than the beginning," and how close to the end game will be the focus of their internal discussions as officials think their communications around the following policy actions can be as crucial as the individual changes as well.
Source: Fed Watch Tool
The rise of 25 basis points would raise the benchmark federal funds rate to a 16-year high (the Fed started raising rates last March 2022 from a near-zero interest rate). The rising interest rates have made officials grapple with potential fallouts from bank failures. And the FDIC's sale of First Republic Bank to JP Morgan Chase & Co. reminds it of the darkening economic outlook brought about by bank stress. The Fed officials are undoubtedly on their toes to see how investors react to the deal ahead of Wednesday's decision, just like when Swiss authorities merged Credit Swiss Group AG and UBS Group AG.
The Fed has been fighting the ongoing rise of inflation through higher rates with the hopes of slowing down the economy. However, this also causes tighter financial conditions. And in turn, it has increased borrowing costs, strengthened the dollar, and lowered stock prices - all of which curb demand. Officials have been looking for clear signs of a slowdown and easing inflation as a sign to start ending the rate increases.
So, what now?
As investors, it's important always to be aware of the market expectations and potential receptions of the markets. Should the Fed signal another possible rate hike after the expected 25 basis points hike, what does it mean to investors? What if it's a pause? Nobody can accurately predict the Fed’s decision, but investors can always be prepared for their next probable action when one of these two scenarios occurs.
Fed Hints At Another Hike:
Should the Fed hint at another hike, this can be a negative signal for the stock market as this continues with the same narrative of rising borrowing costs and inflation still not cooling down. The stock market may experience a sell-off as investors switch to haven assets.
However, it may also pose an opportunity to buy some quality names (cheaply) as the market waits for future signals on the market recovery. For example, stocks like JNJ have stood the test of time with their long history and ability to weather economic downturns.
Johnson & Johnson (JNJ)
Johnson & Johnson is a multinational corporation based in New Brunswick, NJ, that manufactures and sells health-related products and services. It is also one of the world's most valuable corporations, employing more than 140,000 active employees.
JNJ's operations are segmented into three groups:
- Consumer Health: Provides products based on science approved by medical experts to help people improve their health.
- MedTech: Diverse healthcare expertise and purposeful, innovative technology help save lives and aim to create a future where healthcare solutions are smarter, less intrusive, and more personalized in surgery, orthopedics, and interventional solutions.
- Pharmaceutical: Products distributed through the Janssen Pharmaceutical Companies. Janssen envisions a future in which disease prevention, early detection, treatment, and cure will change thanks to its cutting-edge biologics and other medical components.
How Johnson & Johnson Weathered Previous Crises
Johnson & Johnson survived different financial crises by diversifying its products and focusing on research and development that will help communities in the long run. During the Great Depression, the JNJ introduced a line of baby products, which proved to be a huge success. In the 1970s, when the oil crisis caused a recession, JNJ diversified into pharmaceuticals, which helped it weather the storm. And during the dot-com bubble, it continued to invest in research and development and focus on its core business which helped it stay ahead of the competition.
Fed Signals a Pause:
When the Fed hints at a pause, this can be a positive signal for the stock market as it indicates that the Fed sees that inflation may have slowed down and the steps they took have started working, which can boost the confidence of investors that the market may be ready to bounce back.In this scenario, investors may start looking at sectors like tech, which most see as synonymous with risk. For example, with AI being one of the relevant themes in the industry, investors can look at major players like Microsoft, which has been in the headlines with its partnership and stake with Chat GPT.
Microsoft Corp (MSFT)
Microsoft Corporation is a company that specializes in technology. They create and support software, services, devices, and solutions. The company is divided into three segments:
- Productivity and Business Processes - this segment includes products and services related to productivity, information services, and communication, available on different platforms and devices. Some examples are Office Consumer, dynamics business solutions, LinkedIn, and Office Commercial.
- Intelligent Cloud - this segment offers server products and cloud services that modern businesses and developers can use and includes enterprise services.
- Personal Computing - this segment aims to provide a customer-centric experience with its technology through products and services such as gaming devices, Windows, and search and news advertising.
A.I. Visibility
Microsoft has gotten a lot of buzz lately thanks to its partnership with OpenAI and its integration of ChatGPT into its products. Microsoft's Azure cloud service also offers bot services, machine learning, cognitive services, and other AI solutions.
Final Thoughts
The Interest rate hike is one of the most important themes of the markets, as investors have been calling for a pause for some time. With several banks experiencing collapse, investors have seen how devastating high-interest rate environments are even to the financial sector if it's prolonged and has no signs of pause. Investors should always be cautious to ensure that any changes in market sentiment and rise in volatility to the downside would not negatively affect their portfolio.
On the date of publication, Rick Orford had a position in: MSFT . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
