The market rallied yesterday afternoon as investors digested the first Federal Open Markets Committee (FOMC) statement of the year.
In fact, after trading down most of Wednesday, the S&P 500 closed up 1.05%, and the tech-heavy NASDAQ ended the day up 2%. The Dow was about flat. Also important, Treasury yields declined.
In today’s Market 360, we’ll review everything you need to know about the latest Fed statement and Fed Chairman Jerome Powell’s remarks – and your best market strategy going forward.
Fed Double Speak
As expected, the Federal Reserve slowed its pace of key rate hikes yesterday, raising key interest rates by 25 basis points. This is down from the 50-basis-point increase in December, and the four back-to-back 75-basis-point hikes prior.
The latest increases bring the Fed’s benchmark rate to 4.50% – 4.75% – the highest level since October of 2007.
Now, what’s important to note is the Fed voted unanimously to raise rates by 25 points and acknowledged that inflation was slowing down. They stated: “Inflation has eased somewhat but remains elevated.”
The Fed also maintained in its policy statement that “ongoing increases” in interest rates are appropriate for now. In determining the extent of future hikes, the Fed said it would consider that the data lags – and it’s hard to judge monetary policy and the impact on inflation, the economy and financial markets in “real time.”
The Fed always does its best double speak – but the fact that they’re acknowledging that inflation is easing and that the rate hikes are getting smaller is good.
During Fed Chairman Jerome Powell’s press conference, he made it clear that they would be focusing on the labor market. And while Powell didn’t give any indication he would stop rate hikes this year, he did say, “If we do see inflation coming down much more quickly, that will play into our policy setting, of course.”
Furthermore, during the conference Powell stated that it’s “certainly possible” that the Fed will keep its benchmark interest rate below 5%, and that he believes they can get inflation back to 2% without a significant downturn.
That said, Powell also noted that it was pre-mature to declare victory on inflation and that there is still work to do. (There’s that double speak again…)
While it’s not the dovish tone we were hoping for, the fact is, this is good news, folks.
Getting the Fed funds rate to 5% would mean only one more rate increase of 25 basis points. And that’s a big positive for the stock market.
I like the fact that the Fed is acknowledging inflation is easing. It’s also encouraging that the Treasury yields pulled back. As of this writing, the 10-year Treasury yield stands at about 3.36%.
The bottom line is that the Fed can try to tighten all they want, but market rates are falling and inflation is cooling off. So, as far as I’m concerned, the Fed should tap the brakes soon.
Remember, the markets are forward looking – and after yesterday’s action, it’s clear they see a light at the end of the tunnel.
So, once rates are no longer a distraction, investors can focus on positive sales, earnings and guidance, which inherently favors my fundamentally superior Breakthrough Stocks!
The fact is that the market continues to narrow as earnings momentum has slowed dramatically. The S&P 500’s earnings are expected to decline 5% for the fourth quarter and continue to slide in the first two quarters of 2023.
The good news is that the fourth quarter should be the bottom for S&P 500 earnings. FactSet anticipates that the S&P 500 will achieve 3.7% average earnings growth in the third quarter and 10.3% average earnings growth in the fourth quarter of 2023.
So, it’s vital that we remain fundamentally focused and stay invested in stocks with robust earnings and sales growth, as well as positive analyst revisions and strong forward-looking guidance.
This is why I’ve been loading up my Breakthrough Stocks Buy List with fundamentally superior stocks. While the S&P 500 is struggling to post positive sales and earnings growth, my Breakthrough Stocks are averaging 31.3% forecasted annual sales growth and 180.6% average forecasted annual earnings growth!
I should also add that my Breakthrough Stocks are now trading at only five times 2023 average forecasted earnings (and 2.5 times 2023 median forecasted earnings). Such low price-to-earnings (PE) ratios combined with explosive sales and earnings growth is unheard of, so the appreciation potential of my Breakthrough Stocks remains tremendous.
For example, one of my Breakthrough Stocks, Aehr Test Systems (NASDAQ:AEHR), is up more than 100% since reporting stunning earnings for its fourth quarter on January 5. Or we can consider Alliance Resource Partners, L.P. (NASDAQ:ARLP), which surged more than 10% on Monday after the company posted blowout quarterly results.
The fact of the matter is my Breakthrough Stocks are controlling their own destiny by announcing wave-after-wave of better-than-expected quarterly sales and earnings. And I fully anticipate positive earnings reports to dropkick and propel their shares higher.
Given this, I believe 2023 is shaping up to be an incredible year for my Breakthrough Stocks.
If you want to join me on this exciting ride, become a member of Breakthrough Stocks today. You’ll be just in time, since I will be releasing a brand-new recommendation in my Breakthrough Stocks Monthly Issue for February, which will be available after the market closes on Friday. I’ll also discuss my big energy bet and why I expect it to pay off handsomely in the coming months.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Alliance Resource Partners, L.P. (ARLP)