Post-Sugar Rush Blues for “Fed Day”?

Last night, ghosts, ghouls, witches and various incarnations of Barbie trolled the streets in search of treats.

But today, a different monster is lurking.

Sure, plenty are suffering from the predictable alcohol and sugar hangovers.

We’re not talking about those. We’re talking about a monster that isn’t interested in sweets. But in the price tag on the label and the cost of raw materials to get goodies onto store shelves.

It’s that time of the month once again...

Fed Day is here!

You can celebrate it, ignore it or cast a post-Halloween evil eye in its direction. But no matter which route you choose; investors must understand this is one of those market-moving catalysts.

At 2:30 PM ET, Federal Reserve Chairman Jerome Powell will take his place before an ivy of lens and a bramble of microphones to lay out the U.S. central bank’s latest rate-hike decision.

For more than a year and a half, Powell’s presser has had the potential to make or break an investor’s week.

It’s been a monster lurking to scare the most optimistic of bulls and the most pucker-faced bears.

And it’s emerged as an integral catalyst to cover… or at the very least peek at. Regardless of the size of the rate hike or if the U.S. central bank holds steady with a pause, Fed Day has consistently sent ripples through the market.

Though, not always in the direction most investors think…

Don’t Fight Fed Day

One of my tenets of investing is following the trend and understanding probabilities.

If I’m able to create an image – from a rough sketch to an exquisitely detailed masterpiece – of how a company’s shares or the broader indexes respond to a particular event, the better off I tend to be. You’ve likely heard me mention that many times over the years.

I can choose to profit from that reaction, or merely keep the expected move in mind to maintain my sanity.

Well, when it comes to Fed Day and Powell’s press conference, it’s worth understanding the good, the bad and the ugly.

Below we can see the Invesco QQQ ETF (QQQ) – the proxy for the Nasdaq 100 – has had a negative reaction to JPow’s presser for much of the past year…

In fact, tech stocks have dropped on eight of the last 11 official and “unofficial” Fed Days. That’s a 72.7% chance of a decline.

Now, just as a reminder, I always include the Jackson Hole Economic Symposium every August in my analysis. That’s because there’s no Federal Open Market Committee (FOMC) meeting that month. But – and it’s a big but - the Fed chair’s headlining presentation serves as an “unofficial” Fed Day.

What’s interesting is that in the early part of 2022, Fed Day was celebrated by investors. And we saw these explosive moves greater than 2.5% higher from the March through July meetings. But since then, the tone has soured. The pace of inflation has dragged on above expectations for longer than anticipated and the American economy stubbornly refuses to slide into recession.

Today, the focus is going to be on whether the hikes are kaput for 2023. Or if JPow and his team plan to fire off their last shot…

Another Month with One in the Chamber

No gunslinger wants to have their ticket punched while they still have a round in the chamber.

Back in June, the Fed penciled in two more rate hikes in 2023.

One of those was spent in July (and the QQQ ticked 0.33% lower on the announcement).

That means, there’s still one round left so to speak.

Well, every word tumbling out of JPow’s mouth at 2:30 PM ET is going to be instantly sifted through and analyzed.  And markets tend to have these pronounced moves from one minute to the next.  

Currently, rates are 5.25% to 5.5%, or effectively 5.33%.

And the good news is the Consumer Price Index (CPI) has fallen from its peak of 9.1% in June 2022 to 3.7% over the last two months.

But here’s the caution…

As I’ve outlined here before, the U.S. central bank is desperate to avoid the mistakes of the 1970s. That’s when inflation was allowed to regain steam as the Fed let up too soon. And some are worried that’s what we’re starting to see.

CPI has accelerated in the last two months, largely due to surging energy prices.

So, is today the day the U.S. central bank fires off that last round?

Most likely not.

Once again, we can probably expect a pause.

You see, even though we’re still well above the Fed’s target of 2% inflation, there are other concerns on the rise. Geopolitical risks are increasing, and bond yields are elevated. So, it’s safe to assume that the U.S. central bank is going to hold off on a rate hike for the second meeting in a row.

But that doesn’t mean equities will be given the green light to rally.

Instead, the focus will be on what’s in store for the Fed’s next meeting in December. That’s the final one of the year, with one round still sitting in the chamber. Those words will be the only ones that matter.

The markets are solidly in the green this morning. But with the trend we’ve seen, it’s best to temper expectations for the afternoon session. Though, if stocks do continue their breakout higher, that’ll be a welcomed surprise.

Looking for green to go red,

Matthew

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© 2023 Matthew Carr

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