On Wednesday, the Federal Reserve announced a 25-basis point rate hike, a smaller increase than what we grew accustomed to in 2022. Inflation appeared to be moving back into a controlled place. The S&P 500 (SPY) cheered and continued to rally, leading to one of the strongest starts to the year that we’ve seen in… well, years. And then suddenly… a jobs report threw all of that into question. But does it mean the end of our 2023 rally? Read more to find out.
(Please enjoy this updated version of my weekly commentary originally published February 3rd, 2023 in the POWR Stocks Under $10 newsletter).
Market Commentary
On Wednesday, Fed Chair Jerome Powell announced that the central bank was hiking rates by 0.25%, or 25 basis points.
No real surprise there; literally everyone was expecting that. (And truly, I mean everyone. According to the CME FedWatch tool, more than 99% of traders were predicting a 25-basis point hike.)
In my message to subscribers to my POWR Growth service, I wrote that I was expecting one of two scenarios:
1) The Fed shows a few slightly dovish cards, giving investors the greenlight to buy.
2) The Fed doubles down on their previous messaging — “pain,” “more work to be done,” and “ongoing increases” — and the market tumbles.
At the start of Powell’s press conference, I thought we were heading for scenario No. 2.
Within the first few minutes, he had already trotted out the messages that there was “more work to be done,” there would be “ongoing increases,” and that the Fed expected they would have to “keep rates higher for longer.”
But then everything got a bit more moderate, and Powell seemed decidedly less hawkish. Especially during the question-and-answer session.
As the various journalists tried to get Powell to commit to more details of how the Fed is viewing the economy and what they may do if labor stays strong (or some other hypothetical scenario), he let a little more of his dovish side show, saying how the Fed was pleased with the slowdown they’re seeing in inflation and that they would at least consider any data that implied inflation had finally succumbed to their restrictive monetary policy.
In other words, he gave the bulls just enough wiggle room to interpret his message as an attempt to walk back his ultra hawkish statements from 2022.
At one point during the questions, I even said to StockNews CEO Steve Reitmeister, “I think the market closes up today.” And just as expected, it did. In fact, the stock market (SPY) climbed nearly 3% from the start of Powell’s Feb. 1 press conference to this morning’s job numbers…
Which brings me to today’s job numbers. Even though a number of metrics seemed to be showing classic signs that the economy had started to cool off, more than half a million jobs were added to the U.S. economy in January.
That’s significantly higher than the Wall Street estimate for 187,000 new jobs. It also pushed unemployment down to 3.4%, the lowest it’s been in more than 50 years.
Being a day behind schedule did give me the opportunity to digest this surprising report.
It’s especially important to consider because the Fed has made it clear that they’re worried about an overly tight labor market driving up wages and making it hard to cut down inflation. It seems that no matter what the central bank does, jobs remain resilient.
It’s too early to say exactly what this means. The market reacted by selling off 1%, although the week still closed up 1.6%. We won’t know exactly how much this will change the Fed’s current trajectory until they start addressing it at their local rotary club speeches.
Even so, things are certainly looking better than they were at the end of last year. The market has been rallying for multiple weeks now.
And we’ve definitely broken out above the 200-day moving average, which is an important technical indicator and a sign that the market is moving toward “risk on.”
But if inflation starts to rear its ugly head… or even if Powell and the rest of the Fed simply start to worry that their efforts aren’t having as much of an impact as they’d expect… we could be in for another serious round of rate hikes.
Powell is a big fan of the late Fed Chair Paul Volcker, who is best known for ruthlessly driving the sky-high inflation of the 1980s into the ground… and causing a recession.
And while Powell is obviously striving to do a better job of threading the needle and giving us the soft landing everyone is hoping for, he’s going to do what has to be done to keep inflation trending lower.
So, what do we do now?
Whether or not this is actually a bull or bear rally, the bulls are clearly running the show right now. Even after today’s shockingly strong jobs report, traders are still pricing in rate cuts before the end of the year. (They just moved the cut forecast back a few months… from September to November.)
And remember, Powell has still not actually said that the central bank is planning to start cutting rates at any point in 2023, just that “if we do see inflation coming down more quickly then that will play into our views.”
But the market feels very confident we’ll see at least one and maybe even TWO cuts by the end of this year.
In my heart of hearts, I truly believe we have one more leg lower in store before we enter the next true bull market. I know we can’t take the Fed’s language at face value… but, right now, it feels like investors are outright ignoring it.
You know, maybe we should wait for a few more signs that inflation is on the ropes before buying up crypto and tech stocks and other riskier assets. Maybe we’re all getting a little too ahead of ourselves… and maybe the rally is, too.
Even so, there’s no point in sitting on the sidelines forever while we wait for a reality check that may never come. That’s a great way not to make money. Especially when there are amazing stocks under $10 that are delivering massive gains in just weeks.
Therefore, we’re going to continue moving into the bullish camp, just gradually. We don’t want to get caught off guard if there’s a sudden pullback. Unless we see a pullback or pause, I’ll look to start adding one new stock to our portfolio.
I also plan to start trimming stocks that are losing steam. This is exactly what we did earlier this week with Target Hospitality (TH), our 400% winner that I just sold out of the portfolio after it triggered our trade trigger.
Setting trade triggers like that is a smart way to make sure we don’t let our gains evaporate. Better to lock those gains in by selling after we see signs of weakness.
This will ensure we have a portfolio built on strength and not just stocks that were strong at one point but have since run out of gas.
Conclusion
I’m still a little skeptical about this rally, but I’m not going to fight the trend. However, we’re not just doing a cannonball into the deep end of the pool – we have a prudent and effective plan in place to carefully move into the market while the rally can help us.
What To Do Next?
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All the Best!
Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares closed at $412.35 on Friday, down $-4.43 (-1.06%). Year-to-date, SPY has gained 7.82%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Meredith Margrave
Meredith Margrave has been a noted financial expert and market commentator for the past two decades. She is currently the Editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.
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