Fed Sends Market Into Minor Panic

This week we saw a pretty big shift in the market. Following the Federal Reserve meeting Wednesday, the market witnessed a fairly substantial rotation out of small cap, value, and industrial stocks and back into technology names. During the meeting, the Fed announced that they are now forecasting two rate hikes in 2023, which represents a subtle shift away from their ultra-loose monetary policy.

The response from the market implies that it perceives the Fed will be more proactive fighting the potentiality of rising inflation. Interest rates at the long end of the curve (the 30- year bond) fell significantly. Gold, which spends most of its time questioning whether or not it is a flight to quality asset or an inflationary hedge, fell by over 5% (indicating that the flavor du jour for the yellow metal is inflationary hedge). Small cap stocks plummeted over 4%, while the tech heavy Nasdaq 100 gained around 0.50%. The blue-chip Dow Jones Industrial Average fell over 3%, as banks and oil stocks got hit.

It will remain to be seen whether this reaction from the market is a case of money being taken off the table or whether the past 9 months have just been a brief respite from the massively long trend of slowly declining interest rates which serve as a great tailwind for large-cap technology stocks. Economically speaking, it would be a benefit to see a few more winners than just a hand full of tech companies. But the Fed has painted themselves into a bit of a corner—they want inflation, but they don’t want the consequences of higher borrowing costs. By indicating that they will raise short-term rates pre-emptively, they are, perhaps, attempting to put a governor on longer term rates.

However, I suspect the reaction to the Fed moving rates two years from now seems a bit of an overkill by the market. After all, who can predict 6 months out, let alone 2 years out. I suspect much of this week’s market action can be chalked up to option expiration and lighter summer volumes.

Thanks for reading,

Zach and Dave

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