Short-term investors have gotten hurt in a repeat pattern while trying to predict the Federal Reserve’s actions. Long-term investors may win their battle.
The Federal Open Market Committee raised the federal funds rate by 0.50% on Dec. 14 to a range of 4.25% to 4.50%. The expectation of a slower pace of rate increases following four straight moves of 0.75% had some investors thinking differently: That inflation was easing enough for the federal funds rate to hit its peak for this economic cycle sooner rather than later. Again.
This S&P 500
chart shows a repeat pattern of investors talking themselves into a short-term move, only to reverse after Federal Reserve Chairman Jerome Powell explains the central bank’s still-hawkish policy, based on developments in the economy:
On the right side of the chart you can see the recent pattern related to FOMC announcements. From a 2022 closing low of on Oct. 12, the S&P 500 rose 8% through Nov. 1 (the day before the FOMC raised the federal funds rate by 0.75%). Then it fell 4% through Nov. 3, as shorter-term investors woke up to reality. Then the policy pivot-talk pattern repeated, with the index rising 4% from Nov 3. through Dec. 13, before the FOMC announcement and Powell press conference on Dec. 14 helped set up a two-day decline of 2%.
Short-term investors can get burned when Powell doesn’t say precisely what they want him to say. Long-term investors remain convinced that the U.S. economy will head into recession as a result of the Fed’s tightening of monetary policy to fight inflation. This is made clear by the inverse rate curve, with two-year U.S. Treasury notes
yielding 4.27%, while 10-year notes
yield only 3.50%.
The 10-year yield is so much lower than the two-year because investors have been buying long. (There is an inverse relationship between bond prices and yields.) A willingness to buy 10-year paper yielding 3.50% shows investors expect the Fed will to reverse course during a relatively near-term recession and reduce interest rates so much that the investors will be sitting on profits.
This week’s consumer price index report showed a slower-than-expected pace for inflation, although rents were continuing to increase. “The rental equivalent should soon help the downward trajectory more forcefully as new rental leases have been less expensive, reflecting the slowing economy,” according to LPL Financial Chief Global Strategist Quincy Krosby.
In an email on Dec. 15, Krosby wrote that trading activity in the federal funds futures market pointed to a terminal rate of 4.75% to 5%, with a rate cut in November 2023.
She concluded: “The tug-of-war between the Fed and the markets is squarely on the market’s side: The slowdown is not ‘transitory,’ and the Fed will be forced to act before 2024.”
An argument that the Fed should halt rate increases
Rex Nutting argues that the FOMC blew it on Dec. 14 by not calling an end to interest rate increases. He digs deeply to make the case that the economy is already “skating very close to a recession.“
More reaction to CPI, the FOMC and Powell’s remarks:
How to start over and put your financial life in order
Quentin Fottrell writes The Moneyist column to provide all sorts of financial advice, especially as it relates to difficult family situations. What if you were forced to start over? You may never have such a problem, but chances are you will know someone in similar straits. This week, Fottrell helps a 29-year-old woman who has left an abusive relationship and needs to start her career from scratch.
The plight of bitcoin after FTX’s collapse
Terrence Horan, Dow Jones
The arrest of FTX founder Sam Bankman-Fried in the Bahamas on Dec. 12 kept him from testifying (remotely) before the House Financial Services Committee on Dec. 13.
In this week’s Distributed Ledger column, MarketWatch Editor in Chief Mark DeCambre covers various aspects of the unfolding collapse of FTX but also looks ahead. The FTX debacle centers on billions of dollars of assets taken from the accounts of the virtual currency exchange’s customers, but not the viability of bitcoin
itself. Here’s what may happen to bitcoin in 2023, relative to the movement of gold prices
Two year-end must-do’s: rebalancing and required minimum distributions
Many people saving for retirement are disciplined enough to keep pouring money into a group of mutual funds for diversification. But over time, this can lead to a higher concentration in certain assets. Beth Pinsker suggests a measured approach to rebalancing once a year.
Another year-end concern that is very important for people 72 or older with retirement accounts is the required minimum distributions that must be made before the end of this month. Here are three required minimum distribution strategies.
More from Beth Pinsker: ‘Risky behavior’ by young investors is driven by advice on YouTube and Reddit
A Caribbean vacation home might not be out of reach
You might associate the Caribbean with beautiful beaches, hurricanes, Sam Bankman-Fried or all three. But there is quite a bit of variety when it comes to pricing. And not all the islands have the same level of risk from tropical storms. Here’s a detailed look at several Caribbean locations inside and outside the hurricane belt.
Here’s a stock market prediction to hang your hat on
Courtesy Everett Collection
Chuck Jaffe explains how end-of-year predictions work and why this particular stock market prediction is such a good bet.
Holiday bottle-buying guide in 12 categories
At your (bottle) service.
The perfect holiday present for a friend, colleague or family member may come in a bottle. In his Weekend Sip column, Charles Passy shares 12 bottles of booze for every type of drinker on your holiday list.
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