The Fed didn’t hike interest rates this week.
Even though the most recent inflation data from the CPI and PPI was slightly higher than expected, it wasn’t enough to change the overall trend for inflation – which has headed lower for months.
So, investors got what they expected – a pause for rate hikes.
So why did stocks sell off so sharply after the Fed meeting?
One big reason was the Fed’s message that they plan one more rate hike in 2023.
Plus, 12 of the 19 regional Fed governors said they thought there should be another hike this year.
Frankly, this is kind of a strange message for the Fed to send…
Because, why wait? If you think there needs to be another hike, why not just do it and get it over with?
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As I see it, there are a couple plausible reasons that the Fed is pausing the rate hikes, and at the same time saying there will be another hike later this year.
The first reason is that the Fed wants to keep the pressure on. Perhaps they’re worried that if they give the “all-clear” signal there’ll be some kind of wild relief rally and a consumer spending spree that ends up stoking inflation out of its downtrend. Seems unlikely, but what can I say?
Another plausible reason is oil. Oil prices have really moved higher over the last few weeks as Saudi Arabia and Russia pledged to hold production cuts in place for the balance of the year. And of course, higher fuel prices affect every aspect of the U.S. economy…
Shipping costs rise, so the price of shipped goods also rises… People pay more at the pump… Air travel gets more expensive, and so on.
And the recent rally for oil prices definitely helped juice the most recent inflation numbers higher.
So, it’s reasonable to think that if oil prices stay high, inflation will rebound and more rate hikes would be needed.
Strikes and Shutdowns
Of course, there is a third reason that may help explain why the Fed chose to pause its rate hikes – the labor strikes in Hollywood and Detroit. It’s widely believed that if the Autoworkers strike lasts even a month, that’s enough to send the U.S. economy into recession.
In fact, Bank of America estimates that the autoworkers strike will shave 0.2% off of GDP for every week the strikes continue…
It would be bad form for the Fed to hike rates and exacerbate a potentially recessionary event like labor strikes.
Finally, U.S. Congress seems to be steering us toward a government shutdown in less than weeks. That’s yet another event that could weigh on growth.
It seems like even just a week ago, investors’ biggest worry was whether or not AI stocks were in a bubble…
Now we’ve added a Fed that still wants to hike rates, high oil prices that could stoke a rebound for inflation, potentially recessionary labor strikes and a Congress that can’t keep the government functioning.
The bottom line is that there’s suddenly a lot of uncertainty out there. And we all know the old saying “the market hates uncertainty.”
So maybe not that big of a surprise that stocks have sold off…
But you know, the fourth quarter is just a few days away. And third quarter earnings start on October 5.
Let’s start with earnings. Normally, analysts start lowering their earnings estimates as earnings season approaches.
Over the last 10 years, the analysts lower their earnings estimates by an average of 2.7% in the month before earnings get reported. In other words, history says that estimates for the coming earnings season should have been coming down during the month of September…
But that hasn’t happened.
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In fact, analysts have been raising their estimates for earnings when companies when start reporting on October 5.
Interesting, right? Because we all know how the earnings game is played. Analysts make low-ball estimates that companies can easily beat, and then they get a nice pop to their stock prices.
If analysts are raising estimates, the coming earnings season is very likely to be pretty darn good…
And if you really want to get stocks to pop when they report earnings, why not engineer a nice sell off right before earnings season starts?
The S&P 500 confirmed a new bull market on June 8, when it closed over 4,300. Right now, the S&P 500 is at 4,340. The most recent highs for the S&P are almost 300 points higher, at 4,607.
Just yesterday, Bank of America’s analysts raised their year-end target for the S&P 500 to… 4,600.
Coincidence? I don’t think so…
Bank of America knows full well that the Fed, and labor strikes and Congressional ineptitude might be able to take stocks lower for a few days… but when companies start crushing earnings estimates yet again, the S&P 500 will run like a scalded dog.
Smart investors can use the current weakness to buy top quality stocks ahead of a fourth quarter rally.
One of my favorites is a lithium miner out in Nevada that just made a massive lithium discovery. They found an old volcano that’s so packed with lithium, it already ranks as one of the biggest lithium deposits on the planet. Early estimates are this lithium deposit couple be worth $1.5 trillion dollars…
Now, we all know that becoming energy independent might be the single most important goal for the U.S. The shale oil revolution has mostly broken our dependence on Saudi Arabian oil. But we are still energy dependent on China, for both refined lithium and the lithium-based batteries that power the new generation of Electric Vehicles.
This small $3 billion company and its estimated $1.5 trillion worth of lithium might hold the key to the U.S. EV market, and U.S. energy independence.
This stock currently trades at $18. Just a few months back, it was a $28 stock. This little company is one of my top picks to surge higher over the next couple months.
It looks to be one of the best ways to profit from Tesla’s new Master Plan 3.0.
Take care, I’ll talk to you soon,