The Fed has already raised rates twice this year and according to CME Group’s FedWatch Tool, there is currently a 100% probability that they will raise rates again tomorrow when their meeting concludes. Up until recently, the Fed was widely expected to raise raises by 0.50, but there is currently (~3 pm est) a 94.5% probability of a 0.75 increase. Regardless of the actual magnitude of the rate increase, the bond market has already done much of the Fed’s work for it already and the opportunity to “get ahead” of inflation seems long gone now.
In the chart above the 30 trading days before and after the last 113 Fed meetings (back to March 2008) are graphed. There are four lines, “All,” “Up,” “Down,” and “Rate Hike Days.” Up means the S&P 500 finished announcement day with a gain, down it finished with a loss or unchanged. In 113 Fed meetings, there have been just 11 rate increases. These 11 increases are represented by Rate Hike Days. S&P 500 trading leading up to recent hike announcements has clearly been different with a bearish bias in the 10 trading days before the announcement. Of the 11 hike days, S&P 500 was down 7 times and up 4 times with an average gain of 0.23% on all 11. This year’s rate hikes were well received by S&P 500 with gains over 2% on March 16 and May 4. On the day after the last 11 rate hike announcements, S&P 500 has declined 0.69% on average.
For years we have relied upon the Ned Davis Research definition of bear and bull markets. An official bear market requires a 30% drop in the Dow Jones Industrial Average after 50 calendar days or a 13% decline after 145 calendar days. Reversals of 30% in the Value Line Geometric Index also qualify. The drop is measured from peak to trough and both price and time criteria must be met. At today’s close it has been 160 calendar days since DJIA’s peak on January 4, DJIA is down 17.1% and at a new closing low which meets the parameters.
Inflation is stubbornly remaining at multi-decade highs, the Fed is tightening, sentiment is bearish, support levels are not holding, supply chain disruptions persist, there is conflict in Europe and energy prices are at record highs for consumers. Continue to be patient as the Weak Spot of the four-year-cycle will eventually give way to the Sweet Spot, likely sometime later in Q3 or in early Q4. Even with inflation at multi-decade highs, cash is likely the least dangerous place to wait.