TThe consensus expectation is that the Fed will raise rates another 75 basis points, but there is a chance it could go even further. Matthew Caruso of Caruso Insights discusses how the markets might react.
Stocks continued to slide earlier this week as the Federal Open Market Committee (FOMC) kicked off a two-day policy meeting on September 20 that is expected to end with another big rate hike.
Matthew Caruso, the founder of Caruso Insights, does not expect “dramatic movements” in the markets after the anticipated 75 basis point hike announcement. “A lot has been priced into that consensus scenario. The natural impulse at this time is low, but if [the Fed] comes out with the consensus, I think it will actually be slightly positive.”
The consensus expectation is that on Wednesday, September 21, the Federal Reserve’s FOMC will announce a 0.75 percentage point hike, which would see the interest rate rise from near zero in early 2022 to 3-3 .25%.
Last week, the S&P 500 had one of its worst weeks of the year, falling 4.8%. It fell another 1.13% on Tuesday and the Nasdaq Composite fell almost 1%. Meanwhile, the US two-year Treasury note hit a 15-year high of 3.983%, while the 10-year was trading at levels not seen in more than a decade.
Rate hike could create ‘stock picker market’
If the US central bank actually adds 0.75% to US rates, this would create a “stock picker’s market,” Caruso says, where broad indices and ETFs are likely to Stocks (ETFs) are trending down, but some individual stocks manage to break the trend.
Stocks that are capitalizing on persistent macro trends and have positive financial indicators, such as strong future earnings or a healthy pipeline of potential clients, are likely to retain their long-term growth potential. Trends such as the shift to electric vehicles and the push for renewable energy sources could provide exciting opportunities for retailers.
Caruso says he currently owns shares like Wolfspeed [WOLF] and Tesla [TSLA] on your radar for these reasons. The former is up 5.2% since the beginning of the month, while the latter is up 12% through September 20.
In addition to keeping an eye on whatever decision the Fed makes today, traders should pay attention to the tone and tense of the accompanying press conference as they decide how to execute individual trades. “Any discussion by Powell of a more balanced approach given a weak economy, a terminal interest rate or a weak labor market, would be seen as moderate,” he says. “And since a lot of people are positioned in a bearish way, there could be a strong push to the upside. [in response].”
The movement of Treasury notes can provide an indicator of market sentiment. “We recently broke June lows in the 10-year Treasury,” Caruso notes, adding that a dovish tone from the Fed could push the 10-year yield higher. A drop, on the other hand, “would indicate that the market is beginning to believe that the economy is weakening, and Powell’s comments may reinforce that.”
“If you see the two-year yield going up, that means the market has more conviction in Powell and it would be a good indicator of the market’s view of how aggressive the Fed is,” adds Caruso.
It will also be interesting to look at ETFs based on major US indices, with the Invesco QQQ Trust [QQQ] mirroring the Nasdaq 100, while the SPDR S&P 500 ETF [SPY] follows the S&P 500.
Could the Fed impact the markets?
There is a chance the Fed could raise rates even higher, with a small handful of economists believing rates could rise by as much as a percentage point at the next meeting.
This would create an environment of “immediate risk aversion”, warns Caruso. “It will be hard to hide somewhere for the upside if that happens,” he says, adding that the tech-heavy NASDAQ 100 is likely to tumble in this scenario.
If the Fed were to signal an unexpectedly dovish stance, indicating aggressive action is likely to be off the table for the foreseeable future, this could “force people to go long and catch up” as many Traders have taken a bearish stance. position.
“The market is already subtly positioning itself for a more dovish Federal Reserve,” Caruso observes. “Look at the high-growth companies that peaked in February 2021. A lot of these companies, in software, retail, solar, a lot of these companies bottomed out in May, before the market bottom.”
Since then, their prices have been rising, Caruso says, pointing to Celsius Holdings. [CELH]chipotle [CMG] and Tesla as examples. As of September 20, Celsius is up 166.8% from its 52-week low on May 10, while Tesla is up 49.2% since bottoming out on May 24, and Chipotle is trading 42 .1% above its lowest point on June 14.
“That’s the stock market that doesn’t believe the bond market in terms of pricing. We will have to find out which market is the right one,” says Caruso.
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