This is The Takeaway from today’s Morning Brief, which you can receive in your inbox every Monday to Friday by 6:30 a.m. ET along with:
There’s a well-worn market saying: “Don’t fight the Fed.” Coined by investor Marty Zweig in his 1970 book “Winning on Wall Street,” it effectively means that the Federal Reserve’s interest-rate policy has a huge effect on markets.
Of course, a lot has changed since 1970, not least of which is that the Fed is a lot more transparent and communicative and the markets are a lot bigger. What hasn’t changed is the temptation for investors to try to guess the Fed’s next move – sometimes in direct opposition to what Fed Chair Jerome Powell and his compatriots are indicating.
The Fed’s so-called “dot plot,” contained in the formally-named “Summary of Economic Projections,” collects the central banks members’ forecasts for where rates are going. In December, the plot showed the majority predicted rates would end 2023 at 5% to 5.25%, a quarter-point higher than they are today.
As of December 15, 2022 – a day after those projections were released – the CME FedWatch tool was pricing in just a 3.2% probability that rates would finish 2023 where the majority of Fed members predicted. That is, markets were betting that the central bank could cut rates before the end of 2023. Stocks responded by rallying to start the year.
The Fed’s next update on March 22 showed the majority of the dots remained clustered at 5% to 5.25% for the end of this year. The market still doesn’t believe it. It’s pricing in just an 11.7% probability that that’s where rates will end the year – with most bets on lower rates.
Equities, which slumped in the wake of Silicon Valley Bank’s collapse, have since recovered most of their losses.
In other words, the market continues to fight the Fed.
The investment team at Schwab, among others, has maintained that’s risky:
“I continue to think one of the biggest drivers of volatility and weakness in the market this year will be the disconnect between investors’ expectations for significant rate cuts and the Fed’s unwillingness to ease policy this year,” Senior Investment Strategist Kevin Gordon wrote in a recent commentary.
Maybe after another 50 years, the market will stop fighting.
Programming note: Kevin will join Brad Smith and I this morning at 9:15 am ET.
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