Investors held their breath ahead of the Fed’s 3/20 announcement. They clearly liked what they heard as the S&P 500 (SPY) jumped to new all-time highs. With so many gains already in hand since the bull market began, it begs the question of how much upside is truly left. Steve Reitmeister welcomes a path to outperformance even if the overall market begins to produce lackluster returns. He continues reading below for more information.
The Fed’s announcement on Wednesday was as positive as one can get in a period without rate cuts. That’s because inflation numbers have been a little too high lately and seemed to reduce the chances of the Fed sticking to its previous statements about three rate cuts this year.
Fortunately the language was quite clear that they still expect cuts relatively soon (most signs point to June). That gives ample time for 3 cuts in the year that ends closer to Fed officials’ 4.6% estimate. With that, stocks jumped to new all-time highs above 5,200 for the S&P 500 (SPY).
Let’s dig a little deeper into the broad evidence presented by the Fed… what it means for the future of rates… and what it predicts for our stock investment plans.
Comment on the market
Markets were stable before the Fed’s announcement at 2 PM ET on Wednesday. The immediate declaration of wanting to keep pace with 3 rate hikes this year sent stocks higher. Then came Powell’s press conference where more accommodating language was shared.
As for the overall economy, GDP growth of +2.1% is now expected for the rest of the year. Down from last year, which is seen as helpful in bringing inflation back to the target level… but without worries of recession.
The current rate is the likely peak in rates. This therefore means that there is no reason to worry about rising rates (not that anyone was worried). It’s just a matter of when they’ll be comfortable enough to start lowering them. Better to be too late than too early.
The dot plot drawn up by Fed officials indicates an expected rate of 4.6% at the end of this year and 3.9% at the end of 2025. This is a very modest change for next year and undoubtedly less accommodative than most investors expect.
Here is one of the most interesting exchanges of the press conference. Powell was asked how to reconcile statements that they want inflation to return towards the 2% target… but could start lowering rates BEFORE that happens. So, how can you reconcile these 2 statements?
Powell’s response was very informative that there are lagged effects on rate policy. Since they are already in restrictive territory, the first rate cut would still leave high rates in place… but not that high… easing our path to the 2% inflation target.
I liken what he said to a car going 50 miles an hour and stopping at a red light. Very dangerous to brake at the end. Better to start pumping the brakes as soon as possible to get to the traffic lights safely. This way they can start lowering rates in stages, even if not already to the desired inflation target of 2%.
Another big question was whether there was enough time… and enough data to happen between now and May 1stst meeting to issue the first rate cut. Powell did well to essentially dodge that bullet with the language of taking each meeting one at a time… and that they are dependent on data, etc.
Yet it wasn’t hard to read through his statements to realize that the first cuts are very unlikely to come in May. Not surprisingly, the odds of this have now dropped to 6% when they were at 33% just a month ago.
June 12thth the meeting continues to seem the most likely moment with odds now at 74% probability. This is up from 60% just a week ago.
I had previously given this much lower probability of this happening, given the typically conservative nature of the Fed. This includes statements about how they would rather come too late with rate cuts than too early.
But if you add the idea of 3 rate cuts this year with only 5 meetings from June to December… plus the idea that they are comfortable making the first cut before they have reached their inflation target 2%… then yes, June is a very likely first point to cut rates.
That would make it easy to alternate between releasing rates unchanged at the next meeting followed by another quarter-point cut… and repeat until the end of the year, making 3 cuts total and getting closer to the 4.6% estimated by officials of the Fed.
Equally interesting was also the discussion about the slowdown in the pace of sales of the Fed’s assets (bonds). This is what we call “Quantitative Tightening,” which was also part of the rate increase (because a greater supply of bonds in public markets leads to higher rates to attract investors). So, just like with the rate cut decision, they would also like to slow down quantitative tightening as a means of lowering rates and being more accommodative.
Overall it was a clearly dovish meeting that allowed shares to hit new highs above 5,200. Additionally, we saw further upside develop on Thursday.
What was even more welcome than the large-cap gains in the S&P 500 was the broadening of gains into smaller stocks. Like the +1.92% recorded on Wednesday by the Russell 2000 (more than double the returns of the S&P 500 index). This outperformance continued on Thursday as well.
It’s truly been 4 years since large-cap companies beat the returns of smaller stocks. This is NOT the norm as small caps historically have higher growth which generates correspondingly higher stock price gains.
It’s time for smaller stocks to lead the charge. This is the healthiest thing that could happen for the longevity of this bull market (instead of Jenga style piling on for the Magnificent 7…because that’s unstable long term).
Furthermore, at this stage S&P 500 stocks are pushing a rather high PE of 21 times forward earnings. This is a bit excessive for a context of below-trend earnings.
Once again, this indicates that it is time to pay more attention to value, which is most available in small and mid-cap stocks.
Continue reading below for more details on my favorite stocks right now…
What to do next?
Check out my current 12-stock portfolio filled to the brim with the outperformance advantages found in our unique POWR Ratings model. (Nearly 4 times better than the S&P 500 Index dating back to 1999)
This includes 5 recently added hidden small caps with huge upside potential.
I also have 1 specialty ETF that is incredibly well positioned to outperform the market in the weeks and months ahead.
This is all based on my 44 years of investing experience watching bull markets… bear markets… and everything in between.
If you’re curious to learn more and want to see these 13 hand-picked lucky trades, click the link below to get started right away.
Steve Reitmeister’s Trading Plan and Top Picks >
Wishing you a world of successful investing!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO of StockNews.com and editor of Reitmeister Total Return
SPY shares traded at $521.55 per share on Friday morning, down $0.65 (-0.12%). Year to date, SPY has gained 10.07%, compared to a % gain in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” He is not only the CEO of the company, but also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Find out more about Reity’s background, along with links to her most recent articles and headline picks.
Moreover…
The mail Stock Trading Plan AFTER Fed Announcement appeared first StockNews.com