Sometimes it is amusing to watch how stocks trade and then compare them to what bonds and the dollar do. The Federal Open Market Committee (FOMC) meeting went as I expected it would.
The Federal Reserve indicated that tapering was likely to begin in November. During the press conference, Fed Chairman Jerome Powell seemed a little bit nervous in my opinion, and tried to choose his words carefully.
Yet at the end of the day, it seemed the message was pretty clear.
The Fed did downgrade the 2021 GDP growth rate to 5.9% from 7%. No surprise there either. They also did indicate a potential rate hike in 2022, with rates potentially climbing to 1% by 2023.
As the press conference rolled on, the dollar, along with two-, five- and seven-year bond rates, started to rise, as they should with the tapering of quantitative easing on the way in my opinion.
However, in my view, the rates on the 10-year and 30-year fell were most likely tied to the downgrade of GDP growth.
Additionally, the reduction of QE from the mix will likely help to slow growth in the long-run as well. It seemed pretty clear from this reaction, the bond and currency responded how they should to the FOMC decision.
In my view, the equity market seemed to have no clue what to do as usual, rising and falling. Mostly it seemed to be unfazed.
Cyclical stocks had the best performance, led higher by the energy sector and banks. That’s very odd in my opinion.
At this point, one would think that all the good news has already been priced into these stocks, and that slowing GDP growth would negatively impact those earnings expectations.
Also, in my opinion, a stronger dollar should weigh heavily on commodities, emerging markets, material stocks, and multinationals.
In my view, I don’t see how tightening financial conditions, a stronger dollar, and slowing growth is additionally bullish for these sectors.
This post first appeared on September 22 on the Monster Market Commentary blog of Mott Capital Management.
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