Will the US Fed Turn Stock Market Bulls into Steers?

• The US FOMC is set to make its next interest rate announcement Wednesday afternoon, with statements from Fed members telling us to expect another hike. 
• Despite the Fed increasing rates 10 out of the past 11 meetings, the US dollar has weakened against global currencies since the end of September 2022. 
• On the other hand, all three major US stock indexes moved into long-term uptrends at the end of October 2022, with those trends not expected to change any time soon. 

Financial television is running its monthly telethon of chatter about Wednesday’s interest rate announcement from the US Federal Open Market Committee (FOMC). To say there is a great deal of hand wringing and gnashing of teeth is an understatement, the commentators nearly breathless in their anticipation of what is to come. Other forms of media are in the same boat, a truth that makes me want to laugh and cry at the same time. I guess it is difficult when time and space have to be filled, even though markets have long ago digested what members of the Fed have already said. For the record, I’m in the camp expecting a 25 basis-point hike Wednesday afternoon, with another to come at the conclusion of the September meeting.

Why? Because that is what the Fed fund futures forward curve is showing as the most likely outcome. We can also go back to Fed Chairman Powell’s statements to Congress shortly following the June meeting. It was then he made the comment that we should not be surprised by more than one hike through the balance of 2023. This sentiment was echoed by other members at other times. Recall I’ve said in the past that this front-running (probably the wrong term) is a good thing for the markets as it removes at least a little of the chaos that others looked to escalate. Sometimes pushing it to the brink of market manipulation. But that’s a discussion for another day. 

How have the markets handled all the discussion this month? First and foremost, the US dollar index ($DXY) extended the long-term downtrend on its monthly chart to a low of 99.58 during July. This was its lowest mark since April 2022, despite the Fed raising rates 10 times (by my count) from March 2022 through May 2023 before taking a pause at the June meeting. The old theory that the US dollar is driven by interest rate changes has had a number of holes punched in it since the previous long-term uptrend peaked last September. 

US Treasury futures have flattened, though my analysis of the 10-year T-note (ZNU23) monthly chart still shows a long-term uptrend. I see a similar pattern on the monthly chart for 30-year T-bonds (ZBU23). Both could see some knee-jerk selling if, as expected, the Fed goes through with its hike Wednesday. Again, though, I’d argue the fact this move has already been talked about is what has pulled both markets off their recent highs posted this past spring (March for 10-years, April for 30-years).

But what about US stock indexes? This past weekend, MarketWatch posted a story with the teaser, “Will Wednesday’s Fed decision trigger a big stock retreat?” Me being me, of course I had to chime in saying, “No. Next question.” But I’ve had some time to think about it and take in additional data through the early part of this week that has me more concerned about a potential Poseidon Predicament[i]. I don’t like being in the majority when it comes to market opinion, because I’ve long believed the majority tends to be wrong[ii]. Does this change my analysis of long-term uptrends in US stock indexes? Of course not. However, few markets go straight up forever (I want to say never, but there are no absolutes in market analysis) so a setback at some point should be expected. 

What does all this mean for the US business cycle? For now we have uptrends in US Treasuries, US stock indexes, and two of the Three Kings of Commodities are in position for bullish long-term reversals (WTI crude oil and corn). This is the most bullish stage of the six in a normal business cycle, with the next stage Treasuries turning down. According to the same Fed fund forward curve mentioned earlier, it’s possible that could begin with an interest rate decrease expected at the November/December FOMC meeting. 

[i] A Poseidon Predicament is when a vast majority rush to the same side of the boat, causing the boat to roll over. 

[ii] This is not in contrast to Newsom’s Rule #1: Don’t get crossways with the trend. The trend is set by large investment funds who can move the market regardless of underlying fundamentals. Eventually though, Newsom’s Rule #6, Fundamentals win in the end, tends to hold. 

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