On Wednesday, the Federal Reserve announced a rate hike of 25 basis points, a smaller increase than what we had become accustomed to in 2022. Inflation seemed to be coming under control again. The S&P 500 (SPY) cheered and continued to rise, leading to one of the strongest starts to the year we’ve seen in… well, years. And then suddenly… a jobs report put all of that into question. But does this mean the end of our 2023 rally? Read more to find out.
(Enjoy this updated version of my weekly commentary originally published Feb. 3ed2023 in the POWR Shares Under $10 Newsletter).
Market Commentary
Fed Chairman Jerome Powell announced Wednesday that the central bank will raise interest rates by 0.25%, or 25 basis points.
No real surprise there; literally everyone expected that. (And really, I mean everyone. According to the CME FedWatch tool, more than 99% of traders predicted a 25 basis point increase.)
In my message to subscribers of my POWR Growth service, I wrote that I expected one of two scenarios:
1) The Fed shows some slightly dovish cards, giving investors the green light to buy.
2) The Fed doubles down on their previous messages – “pain”, “more work to be done” and “continued rises” – and the market tumbles.
At the beginning of Powell’s press conference, I thought we were headed to scenario #2.
Within the first few minutes, he had already blasted out reports that there was “more work to be done,” that there would be “continuous hikes,” and that the Fed expected to “keep rates high for longer.”
But then things softened up a bit and Powell seemed decidedly less aggressive. Especially during the question-and-answer session.
While the various journalists tried to convince Powell to give more details about how the Fed views the economy and what they might do if labor remains strong (or another hypothetical scenario), he showed a little more of his lenient side by saying how the Fed was pleased with the slowdown they see in inflation and that they would at least consider any data implying that inflation had finally succumbed to their restrictive monetary policy.
In other words, he gave the bulls just enough wiggle room to interpret his message as an attempt to run back his ultra-hawkish 2022 statements.
At one point during the questions, I even said to Steve Reitmeister, CEO of StockNews, “I think the market is closing today.” And as expected, it did. In fact, the stock marketSPY) up nearly 3% from the beginning of Powell’s Feb. 1 press conference to this morning’s jobs numbers…
Which brings me to today’s job numbers. While some statistics seemed to show classic signs that the economy was beginning to cool, more than half a million jobs were added to the US economy in January.
That’s significantly higher than Wall Street’s estimate for 187,000 new jobs. It also pushed the unemployment rate back to 3.4%, the lowest level in more than 50 years.
Being a day behind schedule gave me the opportunity to process this surprising report.
It’s especially important to consider because the Fed has made it clear they’re concerned about an overly tight labor market driving up wages and making it difficult to curb inflation. It seems that no matter what the central bank does, jobs remain resilient.
It’s too early to say exactly what this means. The market reacted by selling 1%, though still finishing the week up 1.6%. We won’t know exactly how much this will change the Fed’s current trajectory until they start addressing it at their local Rotary Club speeches.
Still, it certainly looks better than at the end of last year. The market has been recovering for weeks.
And we certainly broke out above the 200-day moving average, which is an important technical indicator and a sign that the market is moving towards “risk on”.
But if inflation kicks in…or even if Powell and the rest of the Fed just start to worry that their efforts won’t have as much of an impact as they’d expect…we could be in for another serious round of rate increases.
Powell is a huge fan of the late Fed Chairman Paul Volcker, who is best known for ruthlessly driving the skyrocketing inflation of the 1980s into the ground…and causing a recession.
And while Powell is clearly aiming to better feed the wire and give us the soft landing everyone is hoping for, he’s going to do what needs to be done to keep inflation lower.
So what are we going to do now?
Whether or not this is a bull or bear rally, the bulls are clearly running the show right now. Even after today’s shockingly strong jobs report, traders are still pricing in rate cuts before the end of the year. (They just pushed the cutback forecast back a few months… from September to November.)
And remember, Powell still hasn’t actually said that the central bank plans to start cutting rates at some point in 2023, just that “if we see inflation coming down faster, that will influence our views. “
But the market is confident that we will see at least one and maybe TWO cuts by the end of this year.
In my heart of hearts, I do believe we have one more leg down before we enter the next real bull market. I know we can’t just accept the language of the Fed…but right now it feels like investors are flat out ignoring it.
You know, maybe we should wait for a few more signs that inflation is lurking before buying up crypto and technology stocks and other riskier assets. Maybe we’re all getting a little ahead of ourselves… and maybe the rally is too.
Still, there’s no point sitting on the sidelines forever waiting for a reality check that may never come. That’s a great way to make no money. Especially when there are amazing stocks under $10 that are making huge profits in just a few weeks.
Therefore, we are gradually moving towards the bullish camp. We don’t want to be caught off guard when there is a sudden relapse. Unless we see a pullback or pause, I will try to add a new stock to our portfolio.
I also plan to start trimming files that are losing power. This is exactly what we did earlier this week with Target Hospitality (TH), our 400% winner that I just sold out of the portfolio after it triggered our trade trigger.
Setting such trade triggers is a smart way to ensure we don’t let our profits evaporate. It’s better to keep that profit in by selling after we see signs of weakness.
This will ensure that we have a portfolio built on strength and not just stocks that were strong at one point but have since run out of gas.
Conclusion
I’m still a bit skeptical about this rally, but I’m not going against the trend. However, we’re not just throwing a cannonball into the deep of the pool – we have a prudent and effective plan to enter the market cautiously while the rally can help us.
What to do now?
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All the best!
Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10
SPY shares closed Friday at $412.35, down $4.43 (-1.06%). Year-to-date, SPY has gained 7.82% versus a percentage increase of the benchmark S&P 500 index over the same period.
About the author: Meredith Margrave
Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth And POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.
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