[ad_1]
Investors watched the Fed’s announcement on March 20th with bated breath. They clearly loved that the S&P 500 (SPY) hit new all-time highs. There have already been a lot of gains since the bull market began, which begs the question of how much upside room there really is left. Steve Reitmeister is happy to see a path to outperformance, even if the overall market starts producing lackluster returns. Read below for more information.
The Fed’s announcement on Wednesday was about as positive as it could be for a period without rate cuts. That’s because recent inflation numbers are looking a little too high, making it seem less likely that the Fed will stick to its previous statement of three interest rate cuts this year.
Fortunately, the wording was pretty clear that cuts were coming relatively soon (most signs point to June). That would give the Fed enough time to cut rates three times by year-end, close to the 4.6% expected by Fed officials. This pushed the stock to a new all-time high above the S&P 500 (SPY)’s 5,200.
Let’s dig a little deeper into the wealth of evidence presented by the Fed…see what it means for the future of interest rates…and what it predicts for our stock investment plans. Let’s look at.
Market commentary
Markets remained sideways until the Fed’s announcement at 2pm ET on Wednesday. Shares rose after the company quickly announced that it plans to maintain the pace of its third interest rate hike this year. Powell’s press conference came next, and more dovish language was shared.
Regarding the economy as a whole, GDP growth is expected to be +2.1% for the rest of the year. It’s down from last year and is thought to help bring inflation back to target levels…but there’s no fear of a recession.
The current interest rate is likely to be the peak interest rate. That means we don’t have to worry about rate hikes (not that anyone was worried). The question is when do you get comfortable and start lowering it? It’s better to be too late than too early.
A dot plot from Fed officials shows interest rates expected to be 4.6% at the end of this year and 3.9% by the end of 2025. This means next year’s changes are very modest, and there is no doubt that there will be less relief than most investors expect to be true.
Here is one of the most interesting exchanges at the press conference. Powell was asked how he would adjust his comments about wanting to get inflation back to the 2% target, but could start cutting interest rates before that happens. Therefore, how can he reconcile these two statements?
Chairman Powell’s answer was very helpful, pointing out that interest rate policy has a staggered effect. Already in restrictive territory, the first rate cut will likely keep rates high…just not as high…and ease the path towards the 2% inflation target.
I likened what he said to a car running into a red light ahead of you at 50 mph. It is very dangerous to hit the brakes last. To reach the traffic light safely, it is better to start applying the brakes as early as possible. That way, the central bank can start lowering rates gradually, even if it doesn’t reach its 2% inflation target.
Another big question is whether there will be enough time and enough data between now and May 1st.cent meeting to decide on the first rate cut. Mr. Powell essentially dodged that bullet with language about how he would take each meeting one at a time, and that meetings would rely on data, etc.
But it wasn’t too hard to see from his comments that the first rate cut is highly unlikely to happen in May. Unsurprisingly, that probability was 33% for him just a month ago, and now he’s down to 6%.
June 12th A meeting appears to be the most likely time, with current odds at 74%. That’s up from 60% just a week ago.
I have previously stated that the probability of this happening is much lower given the typically conservative nature of the Fed. This includes saying that it is better to cut interest rates too late than too early.
But when you add in the concept of only five rate cuts between June and December, and three rate cuts this year…and the reluctance to make the first rate cut before the 2% inflation target is reached… If you add in the idea that it’s not there…well, it’s June. It is very likely that they will cut interest rates first.
This would make it easier to keep rates unchanged at the next meeting, then cut them another quarter of a point, and repeat until the end of the year, for a total of three cuts, closer to the 4.6% that Fed officials estimate. It turns out.
Just as interesting, there was also talk about a slowdown in the pace of Fed asset (bond) sales. This is what we call “quantitative tightening,” which was also part of the rate hike plan (more supply of bonds on the open market means higher interest rates to attract investors). ). Therefore, similar to the rate cut decision, they will want to lower interest rates and delay quantitative tightening as a more accommodative measure.
Overall, this was a decidedly dovish meeting, allowing the stock to once again hit new highs above 5,200. And on Thursday, we saw more of that upswing.
Even more welcome than the gains in the S&P 500’s large-cap stocks, the gains also spread to small-cap stocks. That’s similar to the Russell 2000 Index’s +1.92% on Wednesday (more than double his return for the S&P 500). This good performance continued on Thursday.
This is the first time in four years that large-cap stocks have outperformed small-cap stocks. This is not the norm, as small-cap stocks have historically had higher growth rates and correspondingly higher share price appreciation.
It’s time for small-cap stocks to take the lead. That’s the healthiest thing that can happen for this bull market to last (instead of building up mountains Jenga-style for the Magnificent 7…because that’s unstable in the long run).
Additionally, stocks at this stage are pushing the S&P 500 to a fairly high P/E ratio of 21 times forward earnings. This is a somewhat extravagant level in a below-trend earnings environment.
Once again, this shows that it’s time to focus more on value in small and mid-cap stocks.
Read below to learn more about my favorite stocks at the moment…
What’s next?
Check out my current portfolio of 12 stocks packed with great benefits from the unique POWR Ratings model. (Nearly 4x better than the S&P 500 through 1999)
This includes five under-the-radar small-cap stocks that have been recently added with tremendous upside potential.
Additionally, I have one particular ETF that is incredibly well-positioned to outperform the market in the coming weeks and months.
This is all based on my 44 years of investing experience, having seen bull markets, bear markets, and everything in between.
If you want to learn more and see our handpicked 13 lucky deals, click the link below to get started today.
Steve Reitmeister’s trading plans and recommendations >
I wish you success in your investments.
Steve Reitmeister…but everyone calls me Leity (pronounced “righty”)
StockNews.com CEO, Reitmeister Total Return Editor
SPY stock was trading $0.65 lower (-0.12%) at $521.55 per share on Friday morning. Year-to-date, SPY has increased 10.07%, compared to the benchmark S&P 500 index’s increase of % during the same period.
About the author: Steve Reitmeister
Steve is better known to StockNews readers as “Reity.” Not only is he the CEO of the company, Reitmeister also shares his 40 years of investment experience in his portfolio. Learn more about Reity’s career and find links to his latest articles and stock picks.
more…
post Stock trading plan after Fed announcement It first appeared stocknews.com
[ad_2]
Source link
