Anticlimactic? Fake news? Unsurprising? Pick and adjective, and you receive a fairly adequate feeling about the Federal Reserve’s latest decision around monetary policy. On Wednesday, the Fed said that it would hold interest rates in place. It said that tapering was “coming soon”. Anyone who thought that there was a curveball coming missed the pitch. The central bank has been playing Radiohead at meetings, it feels: “No alarms and no surprises.”
But despite the Fed’s sudden decision, the question is how the market reacts to the more important numbers from its meeting today. The Fed Open Market Committee has slashed its GDP forecast for 2021. Its June forecast sat at 7%. Its new forecast projects 5.9%. That’s a sizable reduction. Meanwhile, it hiked its GDP growth forecast in 2023 from 3.3% to 3.8%.
I’m surprised by the 2023 forecast, especially with concerns about inflation, the prospect of rising taxes, and questions about how the economy will behave once the central bank starts tapering and proposing higher rates.
I personally don’t see it. But I do understand that the Fed is trying to offset concerns about the fundamentals of the economy at a time that the stock market is so completely detached. Perhaps that’s why Ray Dalio said he expects that the Fed is going to start pumping even more money into the economy in the future.
Riding Momentum Right Away
Regardless of what comes next, we’ll play the hand that is in front of us. We’ve seen momentum improve all day, and we’re back in the space to start putting money to work. This has been a very choppy year – unlike any I’ve seen since I started trading momentum back in 2015.
The conditions for breakout stocks are still in place. We’re looking for lower volumes, higher highs, and a lack of catalysts aside from traders looking to buy for a penny and sell for two. We use trailing stops and other risk management tools to maximize upside and limit losses.
My expectation right now is to focus on how to actively trade bank stocks after this Fed decision. There remains robust potential in the banking sector, both at the mega-bank level for stocks like JPMorgan (NYSE:JPM) and tiny banks that could be buyout candidates at the community level. We’ll talk about those banks starting tomorrow.