In case you missed it, the U.S. Federal Reserve made their scheduled interest rate announcement last Wednesday. Investors were on edge because the Fed has been pumping money into the system to stimulate the economy.
Recall the Fed doing the same thing during the Obama presidency when the Fed Chair Ben “Helicopter” Bernanke had the Fed print trillions (electronically) of dollars in a plan to ease the financial crisis. The Obama Fed pumped the money supply up an additional $4 trillion.
Starting under President Trump and continuing under President Biden, the Fed has doubled that amount again to more than $8 trillion. However, this week the Fed said they are going to start turning the spigot off faster than they had originally planned to stem the rate of inflation.
We know this discussion can get a little “weedy” at this point, so let’s summarize what’s going on so far.
- The Fed wants to avoid inflation (and traders want that, too).
- Shutting off the money printing might slow the economy, which traders don’t like.
What to Do Now
Heading into Christmas, the market is walking a tightrope. If traders decide the pros of cutting off the Fed’s money printing outweigh the cons, we are in good shape.
Despite the volatility last week, we are leaning in favor of an optimistic outlook. One of the reasons we aren’t as worried as some headlines indicate we should be is that despite the Fed’s actions, long-term interest rates are flat or falling.
This brings us to the final point: If long-term rates are falling, that means traders think the Fed’s inflation-fighting will work, which is great for tech, real estate, and retail stocks in the short term.
Because last week consisted of a daily back and forth in the market, our recommendations shouldn’t change too much.
- Despite a tough week, we still like Target Corp. (NYSE:TGT) at or below $220 per share, or Costco Wholesale Corp. (NASDAQ:COST) at any price under $540 per share.
- Because consumers are getting a little jumpy about inflation, we think adding a deep discount retailer like Dollar General Corp. (NYSE:DG) at any price less than $225 is undervalued and will give your portfolio a boost.
- We stand by our recommendation for Microsoft Corp. (NASDAQ:MSFT) to leverage the opportunity to profit from an upswing in the tech sector and a surging Omicron infection rate that may send more people back into distance work.
- We also like Apple Inc. (NASDAQ:AAPL) again under $170 per share. AAPL tends to lead the market higher when long-term rates drop which is what we saw last week.
Watch Out for Thursday
The market is closed on Friday in observance of Christmas Day on Saturday. Leading up to that, volume should be low — it usually is on a holiday week. Normally, that’s a good thing because it gives us flexibility in entering orders and waiting for a good fill price.
However, this week we recommend closing shop before Thursday. The only real serious news (besides pandemic updates) that we will get this week is when the Bureau of Economic Analysis releases their PCE (personal consumption expenditures) inflation report on Thursday.
The PCE report is the one the Fed watches and it will tell us a lot about what to expect next year. The news is going to trigger some wild trading, which could increase the potential for getting a bad price when you enter an order. We plan to let the dust settle over the weekend and then we will take another look at things on Monday.
John Jagerson & Wade Hansen
Editors, Trading Opportunities
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