Home Trading ETFs Fed’s Projections Meet Market Expectations

Fed’s Projections Meet Market Expectations

by TradingETFs.com
Fed's Projections Meet Market Expectations

Major Moves

The last time we received the Fed’s forward-looking estimates for interest rates and growth was last December. At the time, the median estimate for the overnight interest rate by the end of 2019 included two more hikes in 2019. Since then, traders had shifted to an assumption that there was zero chance for a rate hike and a 25% chance for a rate cut by the end of the year as growth has slowed in Asia, Europe and much of North America.

The risk today was that the Fed would not match the market and leave its own estimates higher than expected. Fortunately, the Fed’s new projections were much lower and indicated no rate hikes for 2019 when they were updated this afternoon. Investors no longer need to worry that the Fed will cause a market decline in the short term, which should be good for investors in both bonds and stocks.

However, a more dovish stance isn’t equally good for all stocks. Dividend payers should get a boost, but companies that earn interest will probably take a hit. For example, as you can see in the following chart, Bank of America Corporation (BAC) reversed its recent breakout and was sucked back into its trading channel from January through February. Other interest rate-sensitive groups like insurance companies, brokers and investment managers will probably also take a hit after today’s announcement.

S&P 500

As I have mentioned in previous Chart Advisor issues, Fed-days are prone to an odd kind of whipsaw. Over the past 11 years, whatever the market does in the first 10-15 minutes after the announcement is reversed by the end of the session 75% of the time. While this is interesting, I don’t think anyone besides day traders could really take advantage of the pattern.

What is more important to investors is whether today’s whipsaw is predictive for where the market will be in 10 to 30 days. In the studies I have conducted, there is a mild bullish bias 30 days after the Fed announcement if the initial reaction was positive. If the initial reaction was negative (such as after an unexpected rate hike), there is a slightly negative bias. It is not a strong enough pattern to justify big changes to an investment strategy, but history suggests that traders should still expect a mild bullish edge through the middle of April.

Risk Indicators – Long-Term Interest Rates

From a risk perspective, one issue that I remain very concerned about may sound a little contradictory considering today’s news, which is falling interest rates. To be clear, what the Fed did today was lower expectations that the overnight rate or the federal funds rate would be raised in 2019. This is different than longer-term interest rates like the yield on the 10-year Treasury note. Sometimes these interest rates move the same direction – however, lately, they have been moving differently, which is a potential source for concern.

For example, following the Fed announcement and Chairman Jerome Powell’s comments, the yield on the 10-year Treasury dropped more than 3%. The 10-year yield (TNX) is closely tied to other consumer interest rates like mortgages, credit cards, car loans and student financing. While a declining TNX may sound like a good thing, it tends to indicate a lack of confidence around growth.

The problem is that investors who provide the capital to be borrowed are not incentivized to do so if they can only earn very low interest rates. Falling rates could also be the result of low borrower demand. Either scenario isn’t a good indicator for growth. As you can see in the following chart, the TNX dropped out of its symmetrical triangle pattern on March 8, and the decline following that signal was accelerated today after the Fed announcement.

What this tells us is that the market isn’t ready to collapse, but returns could be very uneven from one industry group to the next. Finance and tech usually lag while interest rates are dropping, while income stocks (utilities, consumer staples) and retail would normally do better. Real estate stocks should also benefit from lower interest rates, but the reaction could be more unpredictable in that group.

Bottom Line: Stocks Still Good, but Outlook Is Getting Hazy

I don’t expect the Fed’s actions to change much about the market in the short term. The Fed probably dodged a potential bullet by lowering its forecasts for the federal funds rate, but investors are much more concerned about growth than plus or minus 25 basis points in the overnight funding rate.

That is where longer-term interest rates can provide additional direction. Right now, the outlook isn’t bearish, but it is getting a bit cloudy. The Fed did what it could today to reassure investors, but growth in Europe, Asia and North America is still slowing, which makes the latter half of 2019 more of an unknown.

Enjoy this article? Get more by signing up for the Chart Advisor newsletter.

Source link Google News

Related Articles

Leave a Comment

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy