Last year, around New Years, the S&P 500 topped out and rolled over into a bear market. The market drop was associated with the Federal Reserve raising interest rates to fight inflation. Stock market bulls couldn’t believe the Federal Reserve would allow the stock market to drop, because for over twenty years now they saw the Federal Reserve take action to stem market drops, whether that be in lower interest rates or in engaging in QE programs. So, last year, they expected, and even cried out for, a new “Fed pivot” to come to jam the market back up, and some bulls recommended buying ahead of such an action, but it never came.
The Federal Reserve couldn’t do it like they had in the past, because of the high inflation readings. But, now the Federal Reserve is actually pivoting, not because they have defeated inflation, but because they must. The interest rate hikes caused the value of bonds to fall enough that it caused a panic this month over the true worth of bank balance sheets. Last week, the Federal Reserve raised interest rates by 1/4 a point, but downgraded its economic outlook and said that it merely “may” raise interest rates again at its next meeting in May. It’s rhetoric amounted to setting up a “pause” in future interest rate hikes.
After the close on Friday, the Fed Fund futures priced in a mere 11.8% chance of another rate hike this year.
The recent banking woes simply have caused rate hike expectations to collapse.
This is the “Fed pivot” and now stock market bulls are likely to buy as a result.
They can see potential double bottoms in key charts. For instance, take a look at this regional bank ETF.
And here is the ETF for the Russell 2000.
While both the IAT ETF and IWM are below their 200-day moving averages, the S&P 500 is still trading around that indicator.
Stock market bulls will focus on this triangle pattern this week. Momentum players also will be more apt to buy into the Nasdaq, as it has been outperforming the S&P 500 this year and can be perceived to be immune from the banking news.
The reality is, though, that technology companies are being impacted by it. The banking woes are tightening credit conditions, which will have an impact on the economy. The Wall Street Journal reported that “no companies with investment-grade credit ratings sold new bonds over the seven business days from March 9 through March 17, the first week in March without a new high-grade bond sale since 2013, according to PitchBook LCD. The market for new junk-bond sales has largely stalled this month, and no companies have gone public on the New York Stock Exchange in more than two weeks.”
It’s not hard now to predict that banks are going to tighten up their lending conditions and look for ways to shore up their balance sheets. Things are not going back to the way they were before 2022, even if many stock market bulls believe they will. It’s a tough market, though, for both bulls and bears. The market can rally, but it is very hard to predict how long it would last here, if it does, as the economy is likely to start to slow down for real.
Bulls have one potential good news item they can buy into. The March CPI number will come out in April and the St. Louis Federal Reserve Branch is projecting that it’s annualized rate will come in at 5.22%. That’d be nice dip from the 6% reading that we just saw the other week and gets down close to the Fed Funds rate. That can help justify the Federal Reserve keeping rates where they are in May. In fact, we could see a trade develop where traders buy ahead of that next Federal Reserve meeting, expecting a pivot paus, and then sell the news so to speak.
I’m not really interested in playing such a possible rally when I can get a guaranteed 5% over 12 months now in CD’s and Treasury Bonds. I also see much more upside going forward now in gold, silver, and mining stocks – more on that later.
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-Mike
