- Moving the markets
Fed head Powell came out and did the expected, namely hike rates by 0.5% to maintain the efforts of crushing inflation.
However, the Fed also signaled that it will not only hike rates higher than traders had anticipated but also hold those rates higher for longer, a hawkish theme that I have pounced on for months, yet wishful thinking of an imminent pause or pivot had dominated Wall Street thinking.
While the major indexes had spent most of the morning above their respective unchanged lines, the Fed’s announcement caused a kneejerk reaction, as equities dropped sharply but then managed to claw back some of the losses.
ZeroHedge summarized Powell’s speech like this:
POWELL: LABOR MARKET REMAINS EXTREMELY TIGHT
POWELL: A RESTRICTIVE POLICY STANCE LIKELY NEEDED FOR SOME TIME
POWELL: NEED SUBSTANTIALLY MORE EVIDENCE OF LOWER INFLATION
POWELL: FED STILL HAS SOME WAYS TO GO ON RATE HIKES
POWELL: STANCE ISN’T YET RESTRICTIVE ENOUGH EVEN W/ TODAY’S MOVE
POWELL: NO RATE CUTS UNTIL CONFIDENT INFLATION MOVING TOWARD 2%
POWELL: WILL HAVE TO HOLD RESTRICTIVE RATES FOR SUSTAINED TIME
In other words, the Fed made it very clear that it will continue its path of hiking rates, announced numerous times over the past few months, with only its magnitude changing depending on the latest data points.
Bond yields rode their own roller coaster with most yields closing lower after the initial spike. The US Dollar followed the same pattern, as did Gold, with the precious metal dropping a tad but holding on to its $1,800 level.
Given Powell’s response about the Fed’s restrictive policy restraints above, it seems to me that equities will have a tough time advancing under those conditions, and I would not be surprised to see the bears get the upper hand again.
2. “Buy” Cycle Suggestions
For the current Buy cycle, which starts on 12/1/2022, I suggest you reference my most recent StatSheet for ETFs selections. If you come on board later, you may want to look at the most current version, which is published and posted every Thursday at 6:30 pm PST.
I also recommend for you to consider your risk tolerance when making your selections by dropping down more towards the middle of the M-Index rankings, should you tend to be more risk adverse. Likewise, a partial initial exposure to the markets, say 33% to start with, will reduce your risk in case of a sudden directional turnaround.
We are living in times of great uncertainty, with economic fundamentals steadily deteriorating, which will eventually affect earnings negatively and, by association, stock prices. I can see this current Buy signal to be short lived, say to the end of the year, and would not be surprised if it ends at some point in January.
In my advisor practice, we are therefore looking for limited exposure in value, some growth and dividend ETFs. Of course, gold has been a core holding for a long time.
With all investments, I recommend the use of a trailing sell stop in the range of 8-12% to limit your downside risk.
3. Trend Tracking Indexes (TTIs)
Our TTIs slipped when the markets were disappointed by Powell’s outlook on rates.
This is how we closed 12/14/2022:
Domestic TTI: +2.52% above its M/A (prior close +3.13%%)—Buy signal effective 12/1/2022.
International TTI: +3.31% above its M/A (prior close +3.54%)—Buy signal effective
12/1/2022.
Disclosure: I am obliged to inform you that I, as well as my advisory clients, own some of the ETFs listed in the above table. Furthermore, they do not represent a specific investment recommendation for you, they merely show which ETFs from the universe I track are falling within the specified guidelines.
All linked charts above are courtesy of Bloomberg via ZeroHedge.
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