The stock market has been waiting all year long for one thing: the Fed to pause its rate-hike campaign.
Yesterday, the central bank signaled it is getting ready to do just that and, in so doing, gave stocks permission to soar.
The story here is shockingly simple.
In the end, it all comes down to the Fed. Want to know whether you should buy stocks yet? It depends on what the Fed is planning to do next.
The U.S. Federal Reserve rules the financial universe. It controls the amount of money floating around the U.S. economy. This affects consumer spending, business growth, and stock prices.
That’s why Wall Street has that old saying: “Don’t fight the Fed!”
A good rule of thumb is to buy stocks when the Fed is the market’s friend (not hiking rates), and sell stocks when it’s the market’s enemy (hiking rates).
And over the past year and change, the Fed has been the stock market’s public enemy No. 1.
Will the Fed Ever Be Done With Rate Hikes?
Since March 2022, the Fed has hiked rates 10 consecutive times – including four jumbo 75-basis-point hikes – in what has been the most aggressive and rapid rate-hiking campaign ever.
It should be no surprise that stocks have slumped since then.
The Fed started hiking rates aggressively. Stocks started crashing.
But over the past few months, things have started to shift.
Throughout last year, the Fed was continually getting more aggressive with its policy stance. The rate hikes kept getting bigger.
But in the last month of 2022, the central bank downshifted from a 75-basis-point hike to a 50-basis-point hike. In the first month of 2023, it downshifted again, this time to a “normal” 25-basis-point hike. And it’s stayed there ever since.
In other words, starting in mid-December 2022, the Federal Reserve started to get less aggressive with its rate hikes. This means it started to become more friendly to the stock market.
And what has happened since December 2022?
Stocks have rallied. The S&P 500 is up more than 6% year-to-date, after falling about 20% in 2022.
Again, that should be no surprise. It all comes back to the Fed.
Over the past few months, it has become less aggressive with its monetary policy. Consequently, stocks have rallied.
And that brings us to yesterday.
Yesterday, the Fed hiked rates by 25 basis points, continuing the trend it established in December 2022.
However, in the press release that announced the rate hike, the Fed omitted certain words and phrases that were in every rate-hike press release since March 2022. They served to signal to the market that more rate hikes were coming.
By omitting them from this month’s release, the Fed is implicitly signaling that no more rate hikes are coming.
In fact, Fed Board Chair Jerome Powell confirmed as much in his press conference yesterday. He explicitly said that the omission of these phrases was “meaningful.”
Take from that what you will. To me, the implication is obvious.
The Final Word
Let’s go back to our golden rule of the stock market.
When the Fed becomes less friendly toward markets, sell stocks. When the Fed becomes more friendly toward markets, buy stocks.
The Federal Reserve is about to take a massive step to become more friendly to markets by stopping its rate-hike campaign in June.
You know what happens to stocks when the Fed pauses a rate-hike campaign
As you can see in the chart below, they rally. Every time.
In other words, I’m writing to you today to deliver three crystal-clear messages:
- The Fed just signaled it will pause its rate-hike campaign next month.
- Since 1980, every single “Fed Pause” has sparked a stock market rally. Every single one.
- In those “Pause” rallies, tech stocks tend to be the biggest winners, posting average returns of about 30% in a year.
The implication? It’s time to buy tech stocks.
I see a big tech-driven stock market rally just around the corner. I also believe certain tech stocks are going to soar 100%-plus in that rally.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.