Ignore the Fed

Brit Ryle

Posted January 31, 2024

You may not remember that the Fed was hiking interest rates at the start of 2018. I didn’t, I had to look it up…

I’m actually pretty proud of the amount of numbers and dates my brain keeps sorted and ready for pretty much instant recall. At the same time, I try not to be too hard on my brain on the infrequent occasions where a file request I make comes up empty. I’ll give my brain the benefit of the doubt that it might have to prioritize sometimes. After all, I don’t want to end up like Homer Simpson, that time his brain deleted the knowledge of how to drive a car in favor of some trivial fact…

So I was scrolling through some seasonal data for the S&P 500 from the past 10 years, covering the week of January 31 to February 8. And the statistics say that the S&P 500 has rallied during this period in 8 of the last 10 years, but the average move higher is actually a negative number.

Weird, right?

Well, my brain demanded that I investigate. And sure enough, the Dow Industrial Average experienced its 6th biggest decline (in terms of actual points, not percentage) on February 2, 2018. The index got smacked for 665 points that day. 

The catalyst was an employment report that showed a bigger than expected jump (200,000 jobs created vs. expectations for 180,000).  The takeaway was that the Fed would hike rates more than consensus at the time. So the market threw a fit, as it will do when it is disappointed. This particular fit was violent enough to make the Fed rethink its rate hike strategy…

So here we are, almost exactly 6 years later, and the market is at a point where the Fed could deliver a pretty severe disappointment…

“He Loves Me, He Loves Me Not…”

Back in November, Fed Chairman Jerome Powell promised interest rates would be cut this year. That’s really what kicked off the rally that we are still enjoying. Today, the market wants to get a clearer picture of when, exactly, these rate cuts will occur and when they will start. And on that front, the market will be disappointed…

Because it’s not reasonable to think that the Fed will say “we’re gonna cut rates next time.” It is much more reasonable to think that the Fed will continue to be evasive until they actually cut rates. And even then, they’ll say something like “we’re cutting rates, but stand ready to hike if inflation picks up again.”

Besides, there is already a “tell” for when the Fed will actually cut rates. It’s called “quantitative tightening,” or QT, and it’s the process by which the Fed is reducing the size of its balance sheet. QT effectively lowers the money supply. The Fed will stop QT before it cuts interest rates.

Another thing I can tell you is that this market is not dependent on rate cuts.

Last night, Microsoft reported a year over year 17% jump for revenue to $62 billion. And it said revenues will be about the same for the current quarter. That’s amazing growth for a company that big. These results completely validates Microsoft’s business strategy. And it has nothing to do with interest rates. 

The Dow Industrials was trading around 25,000 on February 2, 2018, when it suffered that huge 665 point drop we talked about at the start of this article. Since that time, the U.S. economy has suffered through a pandemic that spiked unemployment to 30%, inflation ramping up to 40 year highs, the fastest interest rate hike campaign in history and Russia’s invasion in Ukraine…

And the Dow Industrials currently sits above 38,000. 

Yeah, there will be ups and downs, but there’s only upside to owning great American companies.

That’s it for me today, take care and I’ll talk to you Friday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today
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