The Market Finally Knows the Fed’s Plan. Be Careful What You Wish For.
There is no longer any question that we are in a rate-hiking cycle — and that is not good news.
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The indices are back to where they were before Fed Chair Warsh’s press conference Wednesday afternoon. Stocks dropped sharply as soon as he started speaking, but a bounce began before the close and continued overnight. It now looks like the entire Fed drama was a non-event, but it is really just starting.
The quick bounce is likely because investors now have greater certainty about where the Fed stands. The Fed decision and Warsh’s comments were more hawkish than expected, which created immediate consternation and the selloff. The positive is that the market now knows where the Fed is headed and can price it in. We no longer have as many doubts about what the Fed thinks and what it will do, and removing that uncertainty is worth something even when the news itself was not good.
The Wall Street Journal quoted Mike O’Rourke of Jones Trading, who summed it up in one line. “We have to be prepared that we are in a rate-hiking cycle.”
That is the main message from Wednesday. The market danced around all summer trying to guess what the Fed would do, and it now has to accept that it is in a cycle of rising rates rather than a one-off adjustment. The bounce is driven by relief at knowing, but what it knows is not good news.
There is no significant news flow this morning, which is part of why the bounce has room to run. With the Fed decision absorbed and nothing new to trade, the market is working off the oversold condition rather than reacting to anything positive.
The Bounce Does Not Fix the Problems
Thursday morning’s recovery does not mean the market goes straight up from here. Significant economic issues still exist, and the Fed decision did nothing to resolve them.
A rate hike does not increase the supply of gas and energy. That is a supply-side problem, and raising rates to slow the economy does not fix it. The inflation driving this whole stretch is coming from oil and the Iran war, and the Fed just tightened into it with a tool that works on the demand side of the equation. The pressure that created the problem is still here and will continue as long as Iran remains unresolved.
One of the most interesting aspects of the Fed decision was that it was premised on the economy and employment being generally strong. The reality is that economic strength is lumpy. There are areas that are already struggling, and they will now be under more pressure with higher rates.
The Fed is treating the economy as one healthy whole when it is really a strong AI-driven sector carrying weakness in many other areas. Higher rates will hit the weak aspects of the economy hard.
Can the Bounce Turn Into a Trend?
That is the story unfolding now, and the question is how the market reacts. Can we get sustained upside and new uptrends while these issues are still being sorted out?
The answer is that it is unlikely, but the price action will let us know. I don’t trust this bounce to last long. It is a reaction to having more clarity about the Fed’s plans, and clarity is helpful, but it does not mean the market has fully discounted the ramifications of more hawkish policy. A relief bounce off an oversold condition is a different thing from a durable trend, and the difference will show up in whether the buying holds over the next several sessions or fades.
Game Plan
I will stay vigilant and manage positions closely, but I am not rushing to add risk. I will stay selective with any new buys and I am preparing for more downside in the weeks ahead.
I would be happy to be wrong about that. But at this juncture, I think it is a mistake to believe the worst is over and it is clear sailing from here.
The Fed drama behind us removes one weight, which is why we are bouncing. It does not remove the oil, the seasonal weakness, or the fact that a second hike is now on the table for December. I would rather buy a market that has proven it can hold up than chase the first bounce off a hawkish surprise.
Some certainty about where the Fed stands is good news, but it does not change the problems that created the need for decisive hawkishness.
At the time of publication, Rev Shark had no positions in any securities mentioned.
