The Fed’s Unpleasant Surprise: Now What?

The Fed’s Unpleasant Surprise: Now What?

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As recently as last week, investors were almost 100% confident the Fed would only raise the rate by 0.5%… but expectations shifted after last week’s surprising CPI report.

In case you missed it, the Consumer Price Index (CPI) showed inflation up 1% over the past month and 8.6% compared to last year. That’s bad news. However, there is a sliver of good data that the news overlooked in the otherwise-ominous report…

As we explained Monday, when we get inflation reports, we’re given the headline number and a “core” number that excludes fuel and food. That may sound odd, but the argument is that core inflation is a better measure because energy and food prices fluctuate so greatly from month to month.

The numbers usually are close, but core inflation has decreased due to excluding the high cost of gasoline.

But don’t rush out and buy stocks because core inflation is dropping. It’s a good sign, but we still recommend conservatism. We’re still sticking with energy stocks, particularly those with exposure to natural gas, and (perhaps surprisingly) property- and casualty-insurance group stocks. Returns have doubled among this group in the past month, and they benefit from higher interest rates.

A Skyrocketing Dollar Is a Source of Profits

It seems weird that an inflating dollar is also a strong dollar, doesn’t it? That’s the way the currency market works, and as long as the stock market is as volatile as it’s been in 2022, a stronger dollar can be a great source of profits. In Monday’s livestream, we show you how, as investors, you can take advantage of a strong dollar in a weak market.

The market dipped Monday on predictions (from analysts with terrible track records, in our opinion) that the Fed would raise rates by 75 basis points. The argument is that the Fed could come out in force to fight inflation and raise rates more than expected. But the Fed’s trend over the past 20+ years is to telegraph to the market exactly what they’re going to do…

And Now for the Fed Announcement…

Wednesday’s interest hike of 75 points, or three-quarters of a percentage point, was its most aggressive hike since the mid-1990s. The rate-setting Federal Open Market Committee set a benchmark funds rate to 1.5-1.75%, its highest jump since March 2020, pre-pandemic. Stocks yo-yoed initially but stabilized as Fed Chair Powell spoke after the meeting.

All three major indexes ended the day big on the news. Rather than fearing the higher rates, it appears Wall Street is applauding what it interprets as a genuine dedication from Powell & Co. to crush inflation. We don’t have a crystal ball, but there is strong expectation that the federal funds rate could surpass 3.5% by the end of 2022. Just a week ago, those expectations were just above 3%.

Unfortunately, the rally didn’t hold, and stocks tumbled to their lowest level since January 2021 early Thursday. In Thursday’s livestream, we covered the ensuing fire sale — stocks, bonds, crypto… you name it, and it was selling.

Fast Answers to Your Most Pressing Questions

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