In the wake of the Fed’s latest 0.75 percentage point interest rate hike, and Fed Chair Jerome Powell’s indication that the central bank isn’t done yet, the Dow Jones Industrial Average dropped 1.40%, the S&P 500 fell 3.35%, and the Nasdaq Composite declined 5.65%, reports an article in Barron’s. Meanwhile, Treasury yields rose as expectations that rates will stay high for a while were factored in.
The Fed has raised rates 3.75 percentage points since March, but those hikes are actually closer to 4.74 percentage points when inflation is factored in. The Fed has been fairly single-minded in its focus on tightening across the board until inflation begins to deflate and the labor market loosens up. And indeed, the most recent jobs report did show signs of a cooling labor market, with unemployment increasing and wage gains slowing down a bit, and the stock market reacted to the report positively, according to the article.
But what could possibly happen to make the Fed change course? Though the November jobs report, inflation data, and October CPI are all due to roll in before the Fed makes its next policy call in mid-December, there are likely few things that would keep them from instituting another rate hike of at least 50 basis points. The Fed’s goal is to provide support for maximum employment while also securing price stability. The labor market is still robust, so the central bank has put its focus on combatting inflation, with Powell taking the stance that a potential recession is better than allowing inflation to become “entrenched.” But that stance puts it squarely at odds with the market, the article posits.
As investors lean more towards stocks that are outperforming in this environment of uncertainty, the stocks that are underperforming could continue to do so because the Fed won’t bail them out. That makes those companies that are able to power through the volatile market highly valuable, so the marketplace is pricing them at a premium. With fundamentals a crucial part of what makes those companies winners, now “isn’t the time for bottom fishing…Let your winners run,” the article advises, and points to the iShares Edge MSCI USA Momentum Factor as one ETF with a great deal of exposure to that all-important momentum factor.