So today will be an exciting day. In a few hours we'll find out if the Fed will raise rates by 50 or 75 bps.
I think the market may be getting this one wrong on the 75 bps rate hike. I keep thinking about the story from yesterday and this idea that the WSJ story was a leak: Fed Likely to Consider 0.75-Percentage-Point Rate Rise This Week.
Maybe I have too much time on my hands to think about this stuff, but if you remember, in May, at the last FOMC press conference, Powell basically said the Fed was not actively considering a 75 bps rate hike at coming meetings.
Many investors seemed to take the message from the May meeting that because Powell said they weren’t considering a 75 bps hike, it meant the Fed would NOT raise rates by more than 50 bps. I think the story from the WSJ was just an attempt to give the Fed the flexibility back and undo what had been said in May.
Now, why go through this effort if they weren’t intending on raising rates in June by 75 bps? Perhaps they didn’t want to shock the market with a signal for a 75 bps rate hike in July. So I am of this mindset that the Fed will raise rates by 50 bps and then signal the potential for a 75 bps rate hike in July.
Look, I think, either way, there is a good chance the market rallies post FOMC. Implied volatility is very high and drops off a cliff once you get past this week. So that implied volatility melt should result in stocks getting a pop.
It looks like a nice falling wedge on the S&P 500 intraday of yesterday's price action. So, it wouldn’t surprise me if the S&P 500 rallied back to 3,815 following the Fed, whether they raised by 50 bps or 75 bps.
But ultimately, it is what the Fed signals for rates after June. I THINK the FOMC projections will indicate that the Fed is willing to sacrifice growth and unemployment in its attempt to contain inflation by downgrading its GDP growth estimates and raising its unemployment rate forecasts.
That message will be more meaningful than a 50 or 75-bps rate hike. It is why I think any rally attempt will be short-lived. Too many people believe the Fed is going to back off at the first sign of a weak job report or recession. The Fed needs to deliver the message that it will not back down and will do whatever it takes to break inflation.
If it can do that, the message will be more meaningful. That will ultimately result in the S&P 500 heading towards a 14 PE ratio and a valuation of around 3,300 over time.
TIP ETF
The iShares TIPS Bond ETF (NYSE:TIP fell sharply yesterday, making a new closing low, which I think means that the Invesco QQQ Trust (NASDAQ:QQQ) shouldn’t be too far behind in making a new low of its own.
Goldman Sachs
Goldman Sachs Group (NYSE:GS) hit the lower end of its trading channel the last two days, so maybe the case of a stock market rebound isn’t all that crazy. That region on the trend line for GS has served as a place where the stock has bounced before.
Bank of America
Bank of America (NYSE:BAC) is back to its downtrend starting at the end of March, which could also serve as a place for the stock to rebound.
Roblox
If I have this right, Roblox (NYSE:RBLX) should report its May monthly metric tomorrow. They typically come on the 15th of the following month. I had seen some bullish call activity in the stock last week, and I still see those calls as being open. So maybe the options guys will get one right.
