Stocks May Have Run Ahead of Themselves Again
Michael Kramer | Oct 28, 2022 09:20
- Stocks sharply higher in October on hopes Fed will slow the pace of rate hikes
- At some point, the pace of rate hikes will slow
- Tough to find where Fed is pivoting from and where it is pivoting to
Another week, another hope of some sort of pivot by the US Federal Reserve. This game has been playing consistently in the equity market for most of this year. Many of the big rallies in 2022 have been tied to this Fed pivot narrative. Yet, each time the Fed has pushed back on the market while it continues to raise rates.
This October rally followed hopes the Fed may start to reduce the size of its rate hikes.
It seems to be common sense that the Fed will, at some point, cut the size of its hikes. Historically, a 75 basis point (bp) hike was rare; even a 50 bp hike is uncommon. So, yes, it seems evident that the US central bank will, at some point, reduce the size of rate hikes.
Traders expect the Fed to hike rates 75 bp in November. The Fed has also made it clear through the summary of economic projections (SEP) that it expects to have interest rates of 4.4% by the end of this year. Currently, the market is pricing in 5.3 rate hikes between now and the end of the year. That would be a 75 bp rate hike in November and either a 50 or 75 bps rate hike in December.
Currently, the Fed Funds rate ranges from 3 to 3.25%. A 75 bp hike next month would move the rate from 3.75% to 4%, while a 50 bp hike would take it to a range of 4.25% to 4.5%. That would put it right into the field of the Fed's target. It seems hard to find a pivot here.
The worry may be that the Fed may push rates higher than that 4.25% to 4.5% range, and given the stronger-than-expected CPI report for September, that is possible. But given that the Fed doesn't have the October CPI report to hand, it is hard to imagine it will indicate language to suggest it will slow the pace of hikes and instead stick to some form of data dependency. It could even signal that, given the hotter-than-expected September CPI, rates need to be above those outlined in the SEP.
h2 Stocks Running Ahead Of Themselves/h2Again, this leaves the market hoping for something that may not even exist—a place for the Fed to pivot from or to. This means that markets, like the S&P 500, have run likely ahead of themselves for no good reason because, ultimately, nothing has changed. The Fed appears to be on pace to hit its year-end target.
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Where the risk lies for the markets and the Fed is the inflation data for October. If that report is hotter than expected, one could argue for another 75 bp hike. But at this point, it seems the stock market continues to play the same game and one that it has yet to win.
This time may prove to be no different.
Disclaimer: This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice.
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