How the Fed’s Latest Moves Will Impact the Stock Market

NYSE: SPY | SPDR S&P 500 ETF Trust News, Ratings, and Charts

SPY – Since last week’s commentary, the market has encountered significant volatility as the S&P 500 (SPY) dropped nearly 4% between Thursday’s close and Monday’s low. Since then, the S&P 500 has recovered most of these losses. And, signs are encouraging that the market has put in a durable low. There are some more additional factors such as an improving virus situation, positive seasonality, and a favorable macro backdrop. We will cover these topics in this week’s commentary. Read on below to find out more….

(Please enjoy this updated version of my weekly commentary published September 23, 2021 from the POWR Stocks Under $10 newsletter).

The market has a tendency to do what is least expected. And, the latest Fed meeting was no exception.

The market continued its rally out of an oversold state despite the Fed being more hawkish than expected. This hawkishness manifested in a couple of ways. One is that they are set to taper asset purchases despite the recent rise in cases and trembles of financial stress emanating from China.

The second is that they decreased their growth forecast for 2021 and 2022 while increasing their inflation forecast. Finally, FOMC members seem more concerned about inflation rather than growth which also supports a hawkish bias.

Now, my personal opinion is that way too much ink and brainpower is wasted in analyzing and anticipating the Fed’s moves. Further, the Fed finally getting around to changing its policy nearly 18 months after the nadir of the crisis shouldn’t be surprising.

In fact, one could argue that monetary policy is easier today given that the policy is the same, while the economy has recovered fully across many vectors.

Now, that the economy is back in an expansion mode, earnings will continue to increase, more than offsetting any drag from marginally tightening policy. If earnings were moving in the wrong direction, and the Fed was tightening, then it would be a source of concern.

In addition to the positive backdrop, there is another looming catalyst that should send stocks higher – it’s increasingly likely that coronavirus case counts have peaked. The 7-day moving average of new cases is down by 40%, while cases are down even more in the hardest-hit states like Florida and Louisiana.

As case counts go down, it will lead to increased economic activity in many parts of the economy that continue to operate below their pre-coronavirus levels. These parts of the economy returning to normal are the final component of the economy’s recovery.

Finally, the market is entering Q4 which tends to be quite strong. This year’s setup with the S&P 500 being up more than 20% is especially bullish. The average fund is up around 14% which means that many managers are likely underperforming their benchmark.

This dynamic can result in furious year-end rallies as money managers pile into high-beta stocks to attempt to “catch up” to overall indices. Thus, this could coincide with a period of outperformance for many of the high-beta stocks that are found under $10.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares were trading at $443.08 per share on Friday afternoon, down $0.10 (-0.02%). Year-to-date, SPY has gained 19.67%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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