- Fed hikes rates by 75 basis points, the first time since the 1990s.
- Equity markets reacted positively to the news as all main indices rallied.
- Is this the bottom or just a brief relief rally for equities?
The Fed pulled the emergency brake on Wednesday as it hiked rates by a significant 75 basis points, the largest one-day increase in interest rates since 1994. The surge in inflation and strong employment market meant the Fed felt it had the power to utilize such a significant move to try and catch up to the inflation curve. It has been behind this curve for two years now as the "inflation is transitory" phrase finally was ditched earlier this year.
We remain unconvinced by both Wednesday's price action and the sudden pivot by the Fed. The track record of the Fed both historically and recently does not lend much confidence. This Fed under Powell has been a pump merchant and now it appears to be engineering the dump. Previous Fed boards have not exactly set the world alight either with the irrational exuberance of the '90s leading to the spectacular DotCom collapse. The Fed usually fails to engineer a soft landing to cool inflation, so why should this time be any different? We are currently assuming the US enters a recession in 2023. In fact, the latest GDP Now estimate from the Atlanta Fed shows that the US may already be in a recession.
Recall that a recession is defined as two consecutive quarters of negative economic growth. Last quarter, US GDP growth registered a fall of 1.5%. Economists wrote this off as a one-off surprise due to the Omicron wave in early 2022, import strength as retailers piled up on inventory and inflation hitting home. Well, that one-off looks like it is about to become a trend based on the chart below.
SPY ETF News: Analysts are way way too bullish
With Q1 earnings season now past and the next season about a month or so away, we took stock of the current EPS forecasts from the Wall Street analyst investment community. Wall Street analysts represent one of the most optimistic cohorts of society. Not surprising really, given high pay rates and the dominance of bull markets throughout history. Being bullish is usually correct. This does, however, make analyst forecasts ahead of and during recessions way off course, and this time it looks like more of the same.
Current EPS forecasts for the S&P 500 are for growth of just over 1%. This looks optimistic given the mounting headwinds for the global economy. Supply chains are still a mess, inflation is still raging, and consumer demand and sentiment are turning decidedly lower. The Fed is now back on point, and monetary conditions are tightening at an unfamiliar rate. Add in the strong dollar, which always hurts US earnings, and you have the recipe for some serious downward revisions next quarter we believe.
What all this means is that in the longer term this bear market has more time to run before it bottoms out. We feel the next quarter could see a shock with numerous EPS misses and lower guidance. That may be the washout, but it could also extend into H2 as rate hikes continue to bite. However, with the market being forward-looking, we are likely to reach the bottom nine months before the real economy bottoms out.
SPY stock forecast
From a short term view, the SPY has now broken cleanly the $380 Fibonacci retracement (38.2%). This cements the bearish trend. The remainder of this week and next are likely to see more selling pressure as longer-term investors adjust portfolios in response to the latest Fed move. We already note this morning's total reversal of Wednesday's relief rally. As we approach the end of next week though, the upcoming quarter-end flows (which look considerably positive) could be supportive for equities. With sentiment currently at extreme bear levels, we may have an upcoming bear market rally on our hands. We do have some obvious gaps at $390 and then $401 to fill. $415 remains a key resistance. Before then though $360 as the high from September 2020 looks likely.
SPY chart, daily
Like this article? Help us with some feedback by answering this survey:
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD holds below 1.0750 ahead of key US data
EUR/USD trades in a tight range below 1.0750 in the European session on Friday. The US Dollar struggles to gather strength ahead of key PCE Price Index data, the Fed's preferred gauge of inflation, and helps the pair hold its ground.
USD/JPY stays firm above 156.00 after BoJ Governor Ueda's comments
USD/JPY stays firm above 156.00 after surging above this level on the Bank of Japan's decision to leave the policy settings unchanged. BoJ Governor said weak Yen was not impacting prices but added that they will watch FX developments closely.
Gold price oscillates in a range as the focus remains glued to the US PCE Price Index
Gold price struggles to attract any meaningful buyers amid the emergence of fresh USD buying. Bets that the Fed will keep rates higher for longer amid sticky inflation help revive the USD demand.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
US core PCE inflation set to signal firm price pressures as markets delay Federal Reserve rate cut bets
The core PCE Price Index, which excludes volatile food and energy prices, is seen as the more influential measure of inflation in terms of Fed positioning. The index is forecast to rise 0.3% on a monthly basis in March, matching February’s increase.