The Federal Open Market Committee paused its series of interest-rate hikes this week for the first time in 15 months, leaving rates in a range of 5% to 5.25%. But Fed officials estimated rates would rise to 5.6% by the end of the year, implying two additional quarter point hikes to wrestle with slowing but sticky inflation and a strong US labor market. Following Fed’s remarks, stocks fell and continued to decline to wrap up their worst week since the collapse of the Silicon Valley Bank in March, indicating the market’s three month rally may have come to an end.
But, there is plenty of evidence that the economy is getting better, not worse. Furthermore, the equity rally is broadening from big tech AI stocks to other sectors such as small caps and mid caps. And finally, people who have sat out the recent rally are expecting a recession that has yet to arrive, may be waiting for something that never comes. If these are the signs of the beginnings of the next bull market, what should investors do?
Future Wealth’s View
Paying attention to economic data is by far the most important exercise that every investor can do. Even the Fed has repeatedly said that it is data driven which means that if inflation drops again next month and unemployment stays low and the consumer continues to spend, the Fed may pause again and again and will soon be done. Of course, these are all assumptions and one has to adapt their portfolio to withstand the volatility of the markets going the other way.
But, we at Future Wealth LLC, are getting the sense that the markets are looking beyond the next few months of Fed meetings and looking ahead to 2024, by which time inflation should be in the range that the Fed wants, economy should be starting to get back it footing after the interest disruptions and markets should begin to see massive inflow of money that has been parked in money market funds.
If that scenario plays out, you wouldn’t want to be sitting in the sidelines.