Reading Between the Lines of the Latest FOMC Statement The big news this week came from the Fed, with a pause in the rate hike cycle along with hawkish language from the FOMC (higher rates to come). However, after...
By Jay Soloff
This story originally appeared on StockNews
The big news this week came from the Fed, with a pause in the rate hike cycle along with hawkish language from the FOMC (higher rates to come). However, after a brief pullback in stocks, the S&P 500 (SPY) and other markets have gotten back to their bullish ways. We'll get back to that in a bit, but the good news for us is bullishness can only help our portfolio. Despite the uncorrelated nature of some of our smaller holdings (in terms of market cap), a rising tide tends to lift all boats. Read on for more….
(Please enjoy this updated version of my weekly commentary originally published June 15th in the POWR Stocks Under $10 newsletter).
As expected, the Fed decided not to raise rates at the June FOMC meeting. This comes on the heels of a bigger expected drop in CPI. The popular inflation measure came in at 4%, which was down significantly from 4.9% in the previous month.
The apparent easing of inflation may be one reason the Fed was comfortable not raising rates this time around.
However, the FOMC wasn't shy about being hawkish with its language. There's nearly a 70% chance of a quarter point rate hike in July. Moreover, the central bank made it clear they have a lot of work left to do before they get to the inflation number they prefer.
Nevertheless, the warnings from the Fed made little difference to the stock market. After a brief pullback in the major indices, stocks rebounded by the end of Fed Day. And on Thursday, the S&P 500 (SPY) climbed another 1.2%.
You can see in the chart above, the SPX (S&P 500 index) is clearly above the two-standard deviation upper barrier.
Volatility has increased a bit, so the breach is a bit less egregious than it would have been a week ago. That being said, I would expect some mean reversion next week as the buying subsides.
That's not to say stocks won't keep going up on average. In fact, at this point, I would be surprised by any meaningful selloffs for the next month or so.
Still, as I often say, mean reversion is a real thing and at some point the market will move back towards its mean price.
In the meantime, the economy continues to chug away. Retails sales also beat expectations this week (climbing 0.3% in May) as consumers continue to shop despite higher than normal inflation.
The Fed has an interesting situation on its hands. Do they want to take a chance torpedoing the economy? Or, should their focus be mostly on lowering inflation?
We'll see how things play out, but I would expect a couple more rate increases this year before we are in a position to hold steady (and eventually see lower rates). We may be stuck with higher rates for another year or so at this rate.
Volatility moved a bit higher before the Fed announcement but it fell back down below 15 on Thursday. All signs point towards a continued low volatility regime for the summer trading months. You can see the VIX action in the graph below.
Outside of some unexpected news items, I wouldn't expect any significant increase in the VIX level until we approach the July FOMC meeting.
Keep in mind, the July 4th holiday is major travel season and there isn't likely to be much volatility around that period.
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All the Best!
Jay Soloff
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares closed at $439.46 on Friday, down $-3.14 (-0.71%). Year-to-date, SPY has gained 15.35%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jay Soloff
Jay is the lead Options Portfolio Manager at Investors Alley. He is the editor of Options Floor Trader PRO, an investment advisory bringing you professional options trading strategies. Jay was formerly a professional options market maker on the floor of the CBOE and has been trading options for over two decades.
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