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By Alex
Eule | Tuesday, January 25 Not This
Time. Stocks opened the day down sharply and
then mounted another comeback attempt. This time it wasn't meant to be. While
the major indexes closed off their morning lows, the rebound reversed
late in the day, with the Nasdaq
Composite taking the brunt of the pain. The tech-heavy
index finished down 2.3%. It was the last full day of trading before
the Federal Reserve announces its next rate decision. And while
few people expect any significant changes tomorrow, the
Fed's statement and Chairman Jerome
Powell's decision are likely to
confirm what everyone already knows: Higher interest rates are
coming, and fast. Futures markets imply just a 6% chance of a hike
tomorrow; but there's now a 93% chance of at least one quarter-point rate
increase in March, the next time the Federal
Open Market Committee meets. And it's a steady
drumbeat from there. The conventional wisdom is set on four
increases by the end of the year, a scenario that currently gets a 65%
chance. But there's a 24% chance of as many as five quarter-point
boosts by the end of the year. How far have we come? Well, the futures
market now implies a 0% chance of avoiding rate increases this year. As
recently as September, the market was still pricing in a 50% chance of zero
2022 hikes. Whatever else you read, that change is the main reason we're
dealing with a sharp selloff in stocks. There's a good chance the selling
pressure could ease tomorrow once the Fed issues its statement at 2
p.m., followed by Powell's press conference. For stocks, the anticipation of
rate increases is often worse than the increases themselves. That's
one lesson from the Fed rate hikes that began in 2016, according
to Tavis McCourt, strategist
for Raymond James. He writes: There is no perfect
historical analogy for any equity market situation (this time is always
different), but to us, the January sell-off in 2022 bears striking
resemblance to January 2016 in its timing to the rate hiking cycle, and the
fears that gripped the equity markets, which caused an ~11% pullback in the
S&P 500 in January/early February in early 2016. Everything turned out okay then, with
the bull market continuing for another four years, right up until the
pandemic. The Fed proved to be
flexible, didn’t raise rates quickly enough to cause a recession, the economy
continued to grow and accelerated until 2018, when the market become
concerned that the Fed had finally raised too high in light of a burgeoning
trade war with China. The equity market had a very strong two years in
2016/2017 while rates were moving up, and generally more economically
cyclical sectors outperformed in that time period. I'm not necessarily calling a bottom in
stocks; there are plenty of other things to worry about, from inflation to
corporate profits to geopolitical tensions. But rising rates don't
inevitably lead to bear markets, and that's worth remembering in a 2022
that's sure to be full of hikes. |
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DJIA: -0.19% to 34,297.73 The Hot Stock: American
Express +8.9% Best Sector: Energy +3.9% |
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