The Fed's interest rate decision is coming, the end of this interest rate hike cycle?
On October 31, local time, the Federal Reserve launched a two-day interest rate meeting. The Fed is widely expected to hold on to its guns. Not only that, many analysts interviewed by the first financial reporter believe that the 16-year record of the US long-term bond yield may mean that the Fed's interest rate hike cycle will come to an end temporarily.
"I think this year's rate hike has been completed, and I don't think there will be any more rate hikes at the last two meetings of the year." Jay Woods, chief global strategist at Freedom Capital Markets and former executive director of the New York Stock Exchange, said in an exclusive interview with CBN, "Considering the current strong U.S. economic data, Fed Chairman Jerome Powell will still be hawkish in his rhetoric." ”
The yield on the benchmark 10-year Treasury note has been testing 5% recently, the highest since 2007. According to Woods' analysis, the logic behind it is that investors believe that inflation will not return to the 2% target, and interest rates will remain higher for a longer period of time. "In the short term, the indicator has peaked at the 5% level, and yields are expected to stop rising as the Fed's rate hike campaign ends. However, looking further ahead, 5% may not come as a surprise, as the indicator could well exceed historical levels. Many of the new generation of investors may not have adapted to this, but high yields may become the new normal. Woods said.
San Francisco Fed President Mary Daly has previously said that higher Treasury yields have done part of the Fed's job, which is equivalent to a rate hike, so there is no need for further tightening. Woods said that Wall Street does not seem to disagree with this view, and if interest rate hikes continue, it may cause panic and other problems.
According to the CME Interest Rate Watch Tool, as of press time, the probability of the Fed's interest rate decision in November is 96.7%, and the probability of a 25 basis point rate cut is 3.3%; The probability of keeping the current interest rate unchanged during the year is 68.8%, and the probability of further interest rate hikes of 25 basis points to 5.50%~5.75% is 28.9%.
With the volatility of the bond market, U.S. stocks have continued to fluctuate recently. At the end of October, the Dow fell 1.4%, the S&P 500 fell 2.2%, and the Nasdaq fell 2.8%, and the three major stock indexes all recorded weekly declines for three consecutive months, with the Dow and S&P 500 hitting the longest monthly losing streak since March 2020, and both the S&P 500 and the Nasdaq fell into correction territory last week. In the first six months of this year, U.S. stocks rushed into bull market territory.
"The magnitude of the surge in yields is the real reason for the pullback in the market, particularly for small-cap stocks as well as some of the big growth stocks. Once yields stabilize within a reasonable range, the market will resume its upward trend. Woods further said, "The 10-year Treasury yield, which was below 4.5%, is ideally and now above 4.85%. ”
Investors are no strangers to the "seesaw" relationship between U.S. stocks and U.S. Treasury yields. In August, the yield on the 10-year Treasury note soared from 2.6% to above 4% in less than three months, and last year the US stock market hit its worst year since 2008, weighed down by the Federal Reserve's continued interest rate hikes and recession expectations. A year later, Treasury yields rose again in July this year, quickly breaking through 5% from 3.8% in a short period of time.
"My sense is that investors are now inclined to be risk-averse, and they are pulling out of some of the high-profile stocks that made a lot of profits in the first half of the year, some holding on to the currency and some buying Treasuries for safe-haven purposes. After all, geopolitical tensions are troubling, and holding cash can also be used to buy when the market is lower. Woods said that the catalysts that can prompt a rebound in the broader market include seasonal factors, dovish signals from the Federal Reserve, stronger corporate earnings and clarity on the situation in the Middle East, and in a pessimistic scenario, the S&P 500 can find support around 4050~4100 points.
As of Oct. 27, 49% of S&P 500 companies have reported third-quarter earnings, and 78% of companies have earnings per share that beat market expectations, slightly higher than the five-year average of 77%, according to financial data firm FactSet. However, Meta and Google, which are among the top companies by market capitalization, fell 7% and 12% respectively in the two days after the release of the list.
"Investors are more focused on the bearish side of earnings when listening to earnings calls." "Meta, for example, easily beat expectations in the quarter, but the forward guidance warned that the advertising business would weaken in the fourth quarter, dragged down by geopolitical tensions, led investors to sell," Woods said. The past performance of companies is no longer important, the outlook for the next three to six months is what matters, and I think the current sell-off is over-selling, and the investor mentality is to sell first and then question, especially as geopolitical clouds loom over the market. ”
At the same time, he believes that investors should adopt a long-term strategy, choose stocks that are familiar with their products and services, have used their products and services, and have a good balance sheet, and buy them and hold them for a long time. He also said that it is not a bad time to buy U.S. bonds now, and the yield on 10-year U.S. bonds is 4.5%~5.0%, which is quite impressive in terms of returns.