Investors sold the market off aggressively last week, which made April the worst month for the major stock indexes since the 2020 Covid-19 crash.
Will this week continue that trend, or are investors going to jump in while prices are low like they did at this same point in February and March?
It’s usually difficult to say that one reason or another was the catalyst for a selloff like we saw last week. Still, in our view, it looks pretty likely that concerns about interest rate hikes and inflation deserve most of the blame.
So, if we are right, this week may not be much more comforting for traders. The Federal Reserve will make an interest rate announcement on Wednesday that most traders think will include a hefty rate hike.
The Fed has set the overnight interest rate (“Fed funds rate”) between 0.25 and 0.50%. This matters because most other interest rates rise or fall with the Fed funds rate. Currently, the big money is betting on a hike to 0.75-1.00%.
This all begs the question… are stocks in trouble?
“Be Greedy When Others Are Fearful”
It’s tricky question, but it’s the thing we hear most from investors.
On the one hand, interest rates will still be incredibly low compared to similar historical periods. And because investors have already accounted for a large rate hike, we think the “bad news” is already priced in.
Earnings growth has continued to be positive, and more companies are “surprising” us with better-than-expected profits than the average over the past five years. As we have pointed out already this month, it is highly unusual for a bear market to appear when growth rates are positive.
We have to admit that investor sentiment is very sour despite the favorable growth rates. But we still feel strongly that intelligent investors will follow Warren Buffett’s advice and “be greedy when others are fearful” and stay in.
Here’s How to Prepare
Although earnings are still going to be streaming in this week, the biggest event to look forward to is the Fed on Wednesday, May 4 at 2:00 pm ET. The market could drop or pop on Monday and Tuesday, and it won’t mean much until the Fed has had its say.
If you’re in the market, we’d recommend you make cautious trades early in the week and avoid adding too much risk until we know what the Fed says about future rate hikes in June.
And, as if the Fed wasn’t enough, we will get the official jobs and unemployment numbers from the government on Friday before the market opens. Expectations are pretty good now, and we’ve heard that companies are looking for workers from most of the reports this quarter. So we expect to get a boost of good news at the end of the week, but there is always some uncertainty.
On Our Watchlist
For now, we stand by our watchlist picks last week for consumer defensive stocks like Constellation Brands (NYSE:STZ), Johnson and Johnson (NYSE:JNJ), and defensive retailers such as Costco Wholesale Corp. (NASDAQ:COST) and Target (NYSE:TGT). Prices are low, so the upside is attractive once buyers move back into the market.
However, as we have in the past on weeks like this, we suggest waiting until the big news is out on Wednesday. Doing that risks some opportunity costs, but the tradeoff for most investors is probably worth it.
Traders were selling stocks last week on expectations that the Fed will raise rates, and the Fed will announce its decision on Wednesday. Earnings growth rates are still positive, so we think turning bearish or leaving the market is a bad idea, but you should set your expectations that it may take another week (or at least until Wednesday) for the market to calm down.
Make sure you tune in tonight for our Learning Markets free livestream. Tonight we’ll discuss whether traders should buy the dip, plus more on this week’s Fed and jobs announcements.