The Fed slowed rate hike but markets fell. Why?
The Fed finally slowed its rate hike to 0.5% from the usual 0.75% in the past few occasions.
This is a good sign for the stock market as it has been hammered due to the aggressive rate hikes that began in March 2022.
In fact, this 0.5% hike was expected well before the announcement and the rumor probably gave the market some boost in the past one month.
But why did the stock market fall and have its gains wiped out after the announcement confirmed the 0.5% hike?
S&P 500 was initially up more than 1% and eventually closed down 0.61%.
We believe there were two reasons.
First, it is due to the effect of 'buy the rumor and sell the news'. Investors were buying on the good news of a slowing hike prior to the Fed meeting and stocks were already rising.
When the news finally confirmed the lower rate hike, more investors began to sell as the thesis has played out, leading to higher selling pressure and hence lowered the share prices.
Second, investors started to look for the next milestone and they didn't like the Fed's projected rates.
The Fed's dot plot showed that the peak interest rate for 2023 has risen to 5.1% from 4.6% in September. This is more hawkish and the market needed to price in this new information. And that interest rate is projected to stay above 4% in 2024.
It also doesn't help when Powell sounded hawkish, saying "we are not done."
Taking these together, we are more optimistic than pessimistic. Yes, rate hikes would go on but this is not new.
More importantly, the Fed has entered a new phase where they start to think about how much to raise, rather than raising rates at all cost to tame inflation.
Given that the interest rate is currently at 4.25%-4.5%, there isn't much room to reach 5.1%. Maybe another two more rate hikes and they might stop; 0.5% in January and another 0.25% in March.
The stock market fell but it didn't crash. The US indices were down less than 1%. This is a typical fluctuation.
Thus we believe the market have probably seen the worst and there should be less downside going forward.
This is a good sign for the stock market as it has been hammered due to the aggressive rate hikes that began in March 2022.
In fact, this 0.5% hike was expected well before the announcement and the rumor probably gave the market some boost in the past one month.
But why did the stock market fall and have its gains wiped out after the announcement confirmed the 0.5% hike?
S&P 500 was initially up more than 1% and eventually closed down 0.61%.
We believe there were two reasons.
First, it is due to the effect of 'buy the rumor and sell the news'. Investors were buying on the good news of a slowing hike prior to the Fed meeting and stocks were already rising.
When the news finally confirmed the lower rate hike, more investors began to sell as the thesis has played out, leading to higher selling pressure and hence lowered the share prices.
Second, investors started to look for the next milestone and they didn't like the Fed's projected rates.
The Fed's dot plot showed that the peak interest rate for 2023 has risen to 5.1% from 4.6% in September. This is more hawkish and the market needed to price in this new information. And that interest rate is projected to stay above 4% in 2024.
It also doesn't help when Powell sounded hawkish, saying "we are not done."
Taking these together, we are more optimistic than pessimistic. Yes, rate hikes would go on but this is not new.
More importantly, the Fed has entered a new phase where they start to think about how much to raise, rather than raising rates at all cost to tame inflation.
Given that the interest rate is currently at 4.25%-4.5%, there isn't much room to reach 5.1%. Maybe another two more rate hikes and they might stop; 0.5% in January and another 0.25% in March.
The stock market fell but it didn't crash. The US indices were down less than 1%. This is a typical fluctuation.
Thus we believe the market have probably seen the worst and there should be less downside going forward.
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Moo Top : Some think that Fed is bleeding the market slowly. This hawkish group prefers a good jolt, and pivot out quickly.