Momentum is Red. The central bank will raise interest rates by at least 75 basis points during its September meeting. Federal Reserve Chairman Jerome Powell will speak at 2:30 pm and will discuss the economy’s ongoing challenges. Let me breakdown what I told the WealthPress roundtable event this morning
This morning, I joined Laura Cadden, host of the WealthPress weekly Roundtable. We discussed several topics impacting your money in the coming weeks and months. Let’s recap what I discussed with the team.
On the Fed Announcement
As I noted, the Fed is moving above the trend line for rate hikes for the first time in 32 years. As the chart below shows, the central bank has slashed interest rates ahead of a major economic downturn or crisis around the globe.
This chart alone shows the post-1990s recession, the Dot-com bubble, the 2008 financial crisis, and the 2018 market tantrum. So, what are we focused on here? This is very bearish, as historically, the trend suggests the market will move lower. However, inflation has tied the hands of Jerome Powell and the central bank. I am increasingly concerned about the stability of this market, and I would expect a retest of June lows are in order.
The Fed is on pace to raise interest rates to 4.5% in the year ahead. If we hit 3.0% today, we still have at least another 150 basis points in the months ahead. Do you really believe that this market will hold? I do not. As far as trading the Fed, I would wait until Powell speaks to pick a direction for a day trade today. However, I warn that these markets could correct as soon as tomorrow if a squeeze happens at the end of the day.
Stocks Down, Now What?
Since momentum went negative last week, the S&P 500 has lost nearly 9% at peak. Laura asked me if there was anything I’d be interested in owning right now.
First, I’m interested in Annaly Capital Management (NLY) – a Mortgage REIT that has enough stability right now to warrant the purchase of shares. I don’t believe that the dividend is in danger, and I’m willing to buy shares at $6.00 and another tranche at $5.00 if that pullback happened. Given what I’ve seen from the Fed on its ownership of Mortgage Backed Securities, I do not believe that the central bank will meet its targets on selling.
Second, I think it’s time to look into the bond market. There are very good companies with bonds trading at a discount in the 2024 range. I’m talking about Buffett-backed companies like Occidental (OXY) or Ford Motor Company (F). Does anyone think that these companies will go out of business by 2024?
Not me. BB+ rated bonds are a sweet spot for businesses that produce things we need… and not things we want. I’m buying these bonds at a discount with both hands. Also – remember that the six-month Treasury bond is paying 3.75%. Despite inflation, that’s a no-brainer buy with some of your short-term cash.
Finding a Bottom
How will we know when the bottom comes to this market? Simple, I explained. First, the Federal Reserve will make some pivot on its Funds rate. It will likely cut interest rates, and that might not come for months. But we want to see the actual cut transpire.
Second, insiders will start buying their stocks hand-over-fist. This is the playbook of every crisis dating back to 2008. The key difference between the “overshort” positions of the previous years is the lack of insider buying to call the bottom.
Insiders bought big in 2009 during a Fed pivot, in 2011 when Congress solved its debt ceiling crisis, in 2015 after China slashed the Yuan, in 2018 when the Fed pivoted on its balance sheet, and in 2020 after the COVID crisis.
And third, momentum will be green. We will buy into this market after the all-clear signal is here. Those three things will happen at the same time…