Up, Down or Sideways? What to Expect this Fed Day

Matthew Carr

Sep 20, 2023

The countdown has begun.

Seconds drift away into minutes…

Minutes fall from the clock, turning into hours…

And now, the number of hours left is few.

Celebrate it or shirk it, Fed Day is here.

At 2:30 PM ET, Federal Reserve Chairman Jerome Powell will stand before a wall of cameras and a bramble of microphones to lay out the U.S. central bank’s latest rate-hike decision.

For more than a year, Powell’s presser has been able to make or break an investor’s week.

And during this time, it blossomed into an integral catalyst to cover. Regardless of the size of the rate hike or if the U.S. central bank holds steady with the pause button, Fed Day has consistently been a market mover.

Though, not always in the direction most investors think…

So, sit up and pay attention… time is running short.

A Coin Flip for Gains

There’s a single sentence that makes me cringe.

It is a crutch investors lean on far too often…

“The market is rigged!”

Every time I hear that, I must gently remind investors that maybe they’re doing something wrong. Perhaps their expectations need re-evaluation.

No one likes to admit they may be guilty of a mistake. But I’ve been in this business long enough to learn that if prices aren’t behaving the way you expected, you’ve likely missed something.

This is why my approach to the market relies on probabilities and readily identifiable trends, especially when it comes to catalysts, as I’ve outlined with my VertEA strategy as well as the long-term reaction to Consumer Price Index (CPI) data.

If I have a picture – either a rough sketch or a detailed masterpiece – of how a company’s shares, or the broader indexes, respond to a particular event, the better off I tend to be. If necessary, I can take the proper precautions, as well as position myself to profit or merely maintain my sanity.

So, let’s apply this approach to Fed Day and Powell’s press conference.

As with CPI, I’ve been devoutly following this every month since January 2022. That includes nearly a dozen rate increases – the fastest ramp-up since the 1980s.

Well, here’s how the Invesco QQQ ETF (QQQ) – the proxy for the Nasdaq 100 – has responded to JPow’s presser…

We can see tech stocks have dropped on seven of the last 10 official and “unofficial” Fed Days.

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 the Fed chair’s headlining presentation serves as an “unofficial” Fed Day.

What’s important to note in the trend – and something I’ve been pounding the table over in 2023 – is though it’s been an even split between gains and losses the last 15 months, we’re nearing the end of this rate hike cycle… If we’re not already there. That’s why we’ve started to see the market push higher on this catalyst in recent months.

There have been pauses and allusions to the end being in sight.

Though, we’re not out of the woods. Not quite yet…

One Bullet Left

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.

We know all head holes will be tuned in to hear what JPow has to say at 2:30 PM ET.

Currently, rates are 5.25% to 5.5%.

And growth in CPI has fallen from its peak of 9.1% in June 2022 to 3.7% in August.

That’s the good news.

But here’s the caution…

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.

August’s headline CPI rose 3.7% year-over-year, representing an acceleration from July’s 3.2%. It also marked the first acceleration in inflation since June 2022. Now, the blame for that falls squarely on the shoulders of energy prices, with crude oil rocketing 34% from $67 per barrel at the end of June to over $90 per barrel today.

Of course, when we strip away those volatile energy and food prices, such as with the Personal Consumption Expenditures (PCE) index, inflation appears much tamer. Not gone mind you - and nowhere near the Fed’s goal of 2% - but less concerning than August’s CPI read.

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

Probably not.

Sure, there will be tough talk to keep the doves at bay. But also expect plenty of mentions of “wait and see.” And that’s something investors will want to hear. The question is, whether it’ll be enough to spark a renewed rally. As I outlined last week, the end of September is where the real pain historically begins… and Fed Day is here, smack dab in the middle of that annual bloodbath.

Best to temper expectations. And if the market does jump on JPow’s presser? Well, it’s okay to be pleasantly surprised.

Patiently waiting,

Matthew

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Up, Down or Sideways? What to Expect this Fed Day

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