The S&P 500 (SPY) was off to another great start to 2024. That was until Chairman Powell took the microphone during his January 31 press conference. And things went bad fast. Why? And what will this mean for equity investors in the days and weeks ahead? Investment expert Steve Reitmeister shares his insights along with these top 13 trades in the commentary below.
Stocks were merrily on their way to a date with new all-time highs at 5,000 before Fed Chair Powell took the podium Wednesday afternoon. Investors initially liked what they heard, with some buoyancy in stock prices.
But once Powell made it clear that he views rate cuts at the next meeting in March as highly unlikely, stock prices plummeted to a loss of -1.61% for the S&P 500 (SPY).
Luckily it wasn’t all bad. In fact, I’d say it was a bit of an overreaction.
So, let’s take our time today to delve into the Fed’s key statements and what they will mean for the market in the days and weeks ahead.
Comment on the market
I religiously watch the Fed press conferences that begin 30 minutes after the rate hike decision is released. Prepared statements typically reflect the same sentiment found in the aforementioned press release.
The key to the event always lies in the question and answer section. These unprepared remarks by Powell reveal many more insights. Beyond the words there is also the body language and emphasis of the Fed chair. You can immediately see the market reaction to every positive and negative comment.
The net result as of January 31stst press conference was an almost free fall in stock prices. Above -1.61% we see a much more painful cut than the -2.45% small caps in the Russell 2000 index.
Why?
It basically boils down to one fundamental sentence:
“I don’t think it’s likely that the committee will reach a level of confidence by the March meeting to identify that March is the right time to do that (start cutting rates).”
So the odds of a rate cut in March went down… short-term bond rates went up… and stocks imploded.
On Thursday, cooler heads prevailed, with pleasure. That’s because Powell also made clear that the committee still believes three rate cuts are coming this year. So let’s move expectations for the first cut to May 1stst It’s not that bad in the grand scheme of things.
Net-net, the 10-year Treasury bond rate fell below 4% and stock prices were back on the rise with 5,000 looming on the horizon.
Let’s now get into the finer details of Powell’s press conference as there are some very interesting takeaways to share. Overall, I’m paraphrasing what was said to get straight to the point.
(Here are key ideas from the prepared statement section)
Inflation is still too high and therefore the path forward is uncertain.
Politics is well placed in a restrictive territory. And therefore, do the dual mandate well to bring inflation back to the 2% target while achieving maximum employment.
Reversing policy too soon would risk reigniting inflation, which is bad news for the average consumer.
Reversing course too late carries downside risks for the economy and the labor market.
They are acutely aware of the balancing act required and continue to do what they deem necessary.
(After Powell’s prepared statements, investors are realizing that this is the same old Fed song and that they overreacted to some of the words in the press release. With that, bond rates fell and stock prices they went up temporarily.
Let’s now move on to the Q&A portion which, as noted above, typically unlocks much more valuable insights.)
The committee is still in complete agreement on cutting rates. And 3 times this year is the most recent forecast. The key question is WHEN to start cutting?
Would a weakening jobs picture accelerate your desire to cut rates? YES!
But right now employment is still a bit strong… and that still causes too much wage inflation. Less problematic than before… but still too high.
You disagreed that a soft landing occurred. But would you say a hard landing is out of the question?
Powell Executive Summary: Growth is solid to strong. Ditto for the job market. And we’ve seen inflation come down. Overall, this is a nice image.
And so started the discussion about soft/hard landing.
Key Statement: I don’t think the March rate cut is likely to be based on today’s meeting. And from there the stock market hit bottom.
The S&P 500 stands at 4,889 as of 2pm ET on Wednesday. Yet at the close they fell to 4,845.65 (1.61%). Russell 2000 was even worse at -2.45%.
(End of Powell’s press conference statements.)
As noted earlier, traders were overzealous in hitting the sell button on Wednesday afternoon. Yet when they woke up Thursday, they saw that the investment landscape hadn’t actually changed much.
This means that a 6-12 week delay for the first rate cut does not really change the economic outlook nor the bullish case for stocks.
On the other hand, the S&P 500 has a near-full valuation at PE of 20. Therefore, at this stage we need to see an acceleration in the economy to fuel earnings growth and support much higher stock prices.
The most recent earnings season doesn’t help this picture as future estimates have actually been cut. Indeed, for the next three quarters, average earnings growth is expected to average a tepid 1.5%, well below the longer-term average closer to 8%.
No…this is not a case of a large-scale correction or a bearish trend. This is simply a case that 5,000 is likely to be a place of strong resistance for a while, leading to extended consolidation and trading ranges.
In these periods the overall market average may stabilize, but the cream of the farms will reach the top. Especially those with healthy growth prospects trading at reasonable or discounted valuations.
These are precisely the stocks that POWR ratings help us understand and explain our recent outperformance… and consistent outperformance over time.
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What to do next?
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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 $493.59 per share on Friday morning, up $4.39 (+0.90%). Year to date, SPY has gained 3.85%, 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.
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