Yesterday, the Federal Reserve raised interest rates by 50 basis points and then projected to raise them a bit more in 2023. I had CNBC on for a bit and heard one market commentator suggest that the market is likely to be weak in the first half of next year as the Federal Reserve raises rates and then go up for a strong second half as they cut. A lot of people are predicting that the economy will be ok next year and inflation will crash back down to 2%, so the Fed will be able to lower rates and get us back into the type of secular environment we were in before 2022 – before inflation exploded – they argue.
They really believe it is all “transitory” and due to supply chain issues and the Ukraine war.
In fact, I think the market might actually do OK for the next two months or so and then decline.
After the close, the Fed fund futures are projecting a rate hike in early February up to 5% and then a less than 40% chance of one at their next meeting March.
People are considering the coming last rate hike as the Federal Reserve “pivot” and then the next move will be lowering rates.
I think it’s hard to say how much inflation will actually go down from here.
I don’t believe it going back down near 2%.
Perhaps 5% next year.
I think the markets are actually rallying INTO this so-called “Fed pivot” instead of falling with rate hikes.
That sets up a potential buy the rumor now sell the news scenario for stocks and bonds next year.
At the moment I don’t think much is actually going to happen in the markets for the rest of this year.
If we take a look at a chart of the S&P 500 we can see that it has been in a narrow trading range with 3900 as support and 4100 as resistance for almost a month now.
What happened is that the market essentially rallied into resistance at its 200-day moving average and has since been going sideways.
This can be seen as a slow motion top or a consolidation, the market working off an overbought condition, which would be completed, as it’s now actually oversold on its daily stochastics, as they got below 20 and are now crossing back above it.
If I had to make a bet, I’d bet that the market will breakout of resistance in the next few weeks and have a run up to, and likely through, its August highs into the February Fed meeting.
Economic data releases in January will determine whether that is the final rate hike or not.
Meanwhile, the US dollar index has completed a top.
It tried to make a new support level to rally off of, but smashed through it after the Fed decision yesterday.
The dollar’s rally that started in January ended in October.
A falling dollar sets the stage for a bullish year for gold and silver in 2023.