Well folks, there we have it.
Yesterday, the Federal Reserve provided a clear outlook for the rest of the year.
Yesterday afternoon Federal Reserve Chairman Jerome Powell gave his remarks following the September Federal Reserve Open Market Committee (FOMC) meeting.
As expected, Fed officials voted unanimously to raise key interest rates by 75-basis-points for the third-straight time.
What was surprising was the Fed expects key interest rates to reach 4.25% by the end of the year, which implies two more sizable rate hikes. We’ll likely see a 0.75% rate hike at the November meeting and a 0.50% increase at the December meeting.
Although most anticipated the 75-point hike, the hawkish tone from the Fed shocked the markets.
As a result, the S&P 500 closed down 1.7%, while the Dow Industrial Average and the Nasdaq closed down 1.7% and 1.8% respectively.
All 11 of the S&P 500’s sectors fell and the small-cap Russell 2000 was down 1.2%.
As I write this morning, markets are trading slightly lower but are mostly flat.
So, now that we have a clear idea of what the Fed will do, what does that mean for markets as we head into the last quarter of 2022?
In today’s Market 360, I’m going to share what the Fed’s recent statement means for us and how we can prepare for what’s to come.
High Inflation Means Higher Rates
As we discussed last week, the latest inflation data crushed any hope that the Federal Reserve would back off its aggressive key interest rate hikes this week. The 75-basis-point increase was expected.
You may recall, the August Consumer Price Index (CPI) rose 0.1% month-over-month, missing economists’ expectations for a 0.1% decline. The CPI shocked Wall Street, as energy prices dipped 5% in August, with gasoline prices dropping 10.6%. On the other hand, food prices rose 0.8% last month. Excluding food and energy, core CPI climbed 0.6% in August – and that means inflation is now embedded in many service costs.
In the past 12 months, CPI has soared 8.3% through August, down slightly from 8.5% in July. Core CPI is up 6.3% in the past 12 months, which is up from the 5.9% annual pace in June and July. In other words, core CPI rose for the first time since March.
With expectation that the August CPI would fall, the hotter-than-expected CPI report spooked Treasury yields, which in turn squelched hopes that the Fed wouldn’t raise rates too much this week. The 10-year Treasury yield even broke above 3.5%, while the two-year Treasury nearly breached 4% this week.
Why is this important?
The fact is the Fed needs to catch up with market rates. And that is exactly what they plan to do…
In the wake of the Fed’s rate hike yesterday, Treasury yields spiked higher, with the two-year Treasury yield breaching 4% and the 10-year Treasury yield rising to nearly 3.6%. Treasury yields have moderated this morning.
Powell said, “A failure to restore price stability would lead to greater pain later on.”
While Powell didn’t make the dovish comments I was hoping for, he was very clear about what the Fed plans to do. And that in itself is good news, folks.
Third Quarter Earnings and Beyond…
The bottom line is that things have started to settle down and we have a clearer picture of where the Fed is headed next.
Fortunately, at Growth Investor, we’ve taken steps to align our Buy List to prosper in the current environment, as we’ve loaded up on companies with accelerating earnings and sales momentum. We’ve scooped up crude oil and natural gas stocks, as well as other commodity-related and shipping stocks.
I still anticipate that crude oil prices will remain firm in the near term and other commodity related stocks will also be an oasis for investors, since they are forecasted to post positive earnings while the S&P 500 flounders.
Case in point: FactSet recently reported that the energy sector should achieve average earnings growth of 8.3% in the third quarter, even though oil prices dipped 20% so far in the quarter. The fact is many energy companies remain profitable even if oil is priced at $80 per barrel.
So, I still expect energy companies to produce the best earnings for at least the next two quarters.
It will be “every stock for itself” in the upcoming third-quarter earnings season, and I’m proud that my Growth Investor stocks will post positive sales and earnings growth.
I know it can be unnerving to watch stocks fall… but it’s not time to exit the market and sell your positions. You just need to shift your portfolios to the stocks that will outperform. We are entering a seasonably strong part of the year.
And this year, energy stocks will be the clear leader.
That’s why I’ve loaded up my Growth Investor Buy List with energy stocks this year.