How Will Markets React to September Fed Decision?


The US Federal Reserve

TThe consensus expectation is that the Fed will hike rates another 75 basis points – but there’s a chance it could go even further. Caruso Insights’ Matthew Caruso explains how markets might react.

Equities continued to slide earlier this week as the Federal Open Market Committee (FOMC) opened a two-day policy meeting on Sept. 20 that is expected to end with another major rate hike.

Matthew Caruso, the founder of Caruso Insights, does not expect “dramatic moves” in the markets after the announced 75 basis point hike. “A lot has been priced into this consensus scenario. The natural momentum is down at the moment – but if [the Fed] When the consensus comes out, I think that will actually be slightly positive.”

The consensus expectation is that the Federal Reserve FOMC will announce a 0.75 percentage point hike on Wednesday, September 21, which would take the interest rate to 3-3.25% from near zero in early 2022.

Last week, the S&P 500 had one of its worst weeks of the year, falling 4.8%. It slipped another 1.13% on Tuesday and the Nasdaq Composite fell almost 1%. The two-year US Treasury bond, meanwhile, hit a 15-year high of 3.983%, while the 10-year traded at levels not seen in more than a decade.

Rate hike could create a ‘stock selection market’

If the Federal Reserve does add 0.75% to US interest rates, it would create a “stock selection market,” Caruso says, where broad indexes and exchange-traded funds (ETFs) are likely trending lower, but some individual stocks are bucking it Trend.

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Stocks riding the waves of ongoing macro trends and showing positive financial indicators, such as: Strong future earnings or a healthy pipeline of potential customers are likely to retain their long-term growth potential. Trends such as the electric vehicle trend and the push towards renewable energy sources could present interesting opportunities for retailers.

Caruso says he currently owns stocks like Wolfspeed [WOLF] and Tesla [TSLA] on his radar for these reasons. The former is up 5.2% month-to-date, while the latter is up 12% through Sept. 20.

Traders should not only pay attention to any decisions the Fed makes today, but also pay attention to the tone and tone of the accompanying press conference when deciding how to execute individual trades. “Any discussion from Powell about a more balanced approach in the face of a declining economy, terminal interest rate or a declining labor market would be considered cautious,” he says. “And with many people positioned bearishly, there could be a strong bullish push [in response].”

Treasury bill movement can provide an indicator of market sentiment. “We just recently broke the June lows in 10-year Treasuries,” Caruso points out, adding that a dovish tone from the Fed could push the 10-year yield higher. A decline, on the other hand, “would suggest that the market is beginning to believe the economy is slowing, and Powell’s comments may reinforce that.”

“If you see the two-year rise in yields, it means the market is more confident in Powell and would be a good indication of the market’s assessment of the level of Fed aggression,” Caruso adds.

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ETFs on the major US indices with the Invesco QQQ Trust are also interesting [QQQ] Mirroring the Nasdaq 100, while the SPDR S&P 500 ETF [SPY] follows the S&P 500.

Could the Fed shock markets?

There’s a chance the Fed could hike rates even more, with a small handful of economists believing rates could rise by as much as a percentage point at the upcoming meeting.

Caruso warns that this would create an “immediate risk-off” environment. “If that happens, it’s going to be hard to hide anywhere upside,” he says, adding that the tech-heavy NASDAQ 100 is likely to plummet in this scenario.

Should the Fed signal an unexpectedly dovish stance – suggesting aggressive action is likely off the table in the near term – it could “force people to buy long and catch up” as many traders have adopted a bearish position.

“The market is already subtly positioning for a more dovish Federal Reserve,” notes Caruso. “Look at high growth companies that peaked in February 2021. A lot of these companies — in software, retail, solar — a lot of these companies bottomed in May before the market bottomed.”

Since then, their prices have risen, Caruso says, pointing to Celsius Holdings [CELH]chipotle [CMG] and Tesla as examples. As of Sept. 20, Celsius is up 166.8% since its 52-week low on May 10, while Tesla is up 49.2% since its bottom on May 24, and Chipotle is trading 42.1% higher than its bottom on June 14.

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“This is the stock market not believing the bond market in terms of pricing. We have to find out which market is the right one,” says Caruso.

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