Market Forecast - Make or Break
This week's upcoming FOMC statement release will make or break the market. Let's discuss.
The market has been on-edge in the past week as we approach the May Federal Open Market Committee (FOMC) announcement and press conference on Wednesday (May 4th). The FOMC holds regular meetings throughout the year where the committee updates the ever-important overnight Fed Funds Rate, which sets the tone for all other interest rates on the curve.
This is current Fed chair Jerome Powell in an IMF panel hosed in Washington D.C. in late April alongside European Central Bank President Christine Lagarde and other representatives from the IMF from Indonesia and Barbados. CNBC’s Sara Eisen moderated the panel. During this discussion, Jerome Powell put the market off-kilter by stating:
“I would say 50 basis points will be on the table for the May meeting”
50 bps points is 0.5%, which would be a significant interest rate increase. The current rate is only at a mere 0.5% so this increase will effectively double the going rate. Rate increases are generally at 0.25% increments per-meeting and this is what the market priced in prior to this late April IMF panel.
If you’re curious about how exactly interest rates affect stocks, check out this newsletter issue from early April:
The steep market decline heading into the weekend (SPY down 3.70% on Friday) is likely the result of jitters from Wednesday’s FOMC statement release. Even though JPow simply said that a 0.5% increase is “on the table”, markets like to price in worst case scenarios.
Bring the old JPow back! The JPow of late appears to have made a 180 on monetary policy. His 2020 and 2021 self was seemingly willing to print endless amounts of money to save the market and was meme’d as such. Maybe he got Fed-up with the memes. Despite this, we’re bullish, read on to find out why.
The Context
The Fed is trying to quell inflation and its best tool is raising interest rates. The higher the interest rates, the harder it is to borrow money and the more attractive it is to park money in bonds, thus reducing total money supply in the economy. Less money in the economy means less demand.
However, the current inflation is caused not by high demand, but by constrictions in supply brought forth by intense lockdowns and a war on the other side of the world. Last week’s US GDP print of a 1.4% contraction pretty much confirmed this.
Despite this, the Fed has been increasingly aggressive with their rhetoric, even getting the most dovish Fed governor, Lael Brainard, to make a statement in early April saying that the Fed will engage in both interest rate increases and an aggressive balance sheet run-off. This statement really spooked the market and makes it clear that the Fed is serious about pulling back monetary policy.
The Fed, at the moment, seems to be relying heavily on rhetoric to cool down the market. They have yet to aggressively increase rates, nor even begin to rundown the balance sheet. It almost seems like, through this rhetoric, they want the market to do their job for them without having to actually go through these risky policy changes.
The Forecast (slightly bullish)
I think with the recent market sell-off and the negative GDP print, the Fed will take a more moderate approach and increase the Fed funds rate by 0.25% instead of 0.5%. Demand is weak and if the Fed takes too aggressive a path too quickly, they could definitely break something in the system (like in late-2018) or trigger a recession.
If the Fed chooses to raise by 0.25% instead of 0.5%, the market should recover and go green after Wednesday. In the meantime, expect the market to be mostly red and jittery as we approach Wednesday.
The Long-Term Forecast (very bullish)
The House recently passed the Securing a Strong Retirement Act of 2022 (SECURE Act 2.0). This was a rare bipartisan vote with 414 votes in favor of the law and 5 against. If passed by the Senate and signed into law by Biden, it’ll be a massive policy shift for retirement savings and investment.
The bottom line is that, if this law passes, money being funneled into investment retirement savings accounts like 401(k)s and IRAs will increase significantly, which bodes very well for the stock market. It looks like the law will definitely pass.
The current market rout might feel painful but the long-term trajectory of the market appears to be very bullish, especially if the SECURE Act 2.0 passes. Assuming geopolitical tensions ease off as we near year-end, expect the market to resume a low volatility uptrend in the second half of the year.
Oh and Crypto… (more bullish)
Fidelity recently announced plans to allow Bitcoin investments in their 401(k) plans. Being the nation’s second largest 401(k) provider, this is incredibly bullish for Bitcoin. According to Pensions&Investments, target-date fund assets reached $3.27 trillion in 2021. If only a small portion of these assets were allocated to Bitcoin, which currently has a mere $700 billion market cap, it’d propel balloon Bitcoin’s (and the rest of the crypto market’s) valuations.
Bitcoin/Crypto is currently by far the best-performing asset in the pandemic-era market and it appears to be getting even more bullish going forward.