Posted September 21, 2022
By Ray Blanco
Failure is Not an Option
Coming at no real surprise to anyone, the Fed opted for another 75 bps rate hike at its policy meeting earlier today.
News of the hike sent the three major indices into the red right at 2:00 PM EST, only for sentiment to turn around and carry us back into the green.
That move ended up fizzling out and the market closed red on the day.
However, these day-to-day moves don’t matter much in the grand scheme of things.
What matters more is the overall trend in the market and we’re still looking at a tough trading environment right now.
I expect we’ll see a few false moves this week as investors digest the Fed’s actions.
This market is a bit broken right now, but risk is to the upside if investors can find any positive takeaways.
Dollar strength is crushing risk asset prices right now. And staring down the barrel of inflation isn’t helping much, either.
For now, it looks like investors are all waiting to see some real signs that the Fed has a handle on inflation before getting back into these markets.
Digesting The News
Taking a look at a heatmap of how stocks were performing shortly after the Fed meeting we got quite the mixed bag:
A few notable standouts are that semiconductor names performed well today, alongside aerospace and defense.
The headline for a pop in defense stocks comes thanks to Putin issuing a new wave of threats regarding the ongoing conflict in Ukraine.
In case you missed it, Putin put out an order to mobilize reservists and hinted he would even consider using nuclear weapons in the conflict.
This escalation stems from a handful of losses on the battlefield and the pressure to respond to harsh criticism from President Biden.
In his address to the UN, Biden urged world leaders to stand against Putin, accusing Russia of “shamelessly violating” the United Nations charter.
It’s interesting to me that this news didn’t shake up the market much this morning, maybe everyone was too focused on the Fed meeting…
Either way, I think defense names will get a solid boost from all this.
Unfortunately, here’s the same heat map from today’s closing bell:
I guess investors didn’t like the rate hike…
Speaking of which, let’s look at how the Fed meeting went.
Failure is Not an Option
Today’s rate hike officially brings the benchmark interest rate to a range of 3.0% to 3.25%. That’s the highest level we’ve seen since 2008.
During today’s meeting, Fed chairman Jerome Powell said "my colleagues and I are strongly committed to bringing inflation back down to our 2% goal."
Then, in the question-and-answer session, Powell doubled down that "we are focused on... getting inflation back down to 2%. We can't fail to do that. I mean, if we were to fail to do that, that would be the thing that would be most painful for the people that we serve. So, for now, that has to be our overarching focus."
Fed officials are also expecting that rates will get higher than before and stay at that level for longer.
Officials stated that they see the Fed rate rising to 4.4% by the end of this year and 4.6% by the end of 2023.
That’s up from 3.4% for this year and 3.8% previously.
Powell continued, "if we want to set ourselves up, really light the way to another period of a very strong labor market, we have got to get inflation behind us, I wish there was a painless way to do that. There isn't. What we need to do is get rates up to the point where we're putting meaningful downward pressure on inflation. And that's what we're doing."