This earnings season came with low expectations. This is creating a low hurdle that most companies are having success leaping over allowing the overall market to trudge higher.

The next hurdle is on Wednesday July 26^th when we get the Fed rate decision. The question on everyone’s mind is whether the Fed is staying on their hawkish inflation fighting war path…or are investors right that they should be ready for a pivot to lower rates sooner than expected?

That topic and more will be at the heart of today’s Reitmeister Total Return discussion.

Market Commentary

First, please be sure to join me this Thursday 7/27 for my webinar presentation:

At the last Fed meeting Powell pounded the table that given the persistence of high inflation, Fed officials were prepared to do 2 more quarter point rate hikes. In the weeks that followed we got served up very good news on the inflation front with much lower than expected readings for the July CPI and PPI reports.

Yet still coming into the announcement Wednesday 7/26 @ 2pm ET there is a 99% expectation of a quarter point rate hike on the way. And here is what investors currently expect at subsequent Fed meetings:

20% chance of another quarter point at 9/20/23 meeting

44% chance of another quarter point at 11/1/23 meeting

Then you have varying degrees of expectation of rates getting cut in 2024. However, even by June 2024 you have still have more than 38% odds of rates at a very hawkish 5% or above.

This continues to have rates inverted which is historically one of the best predictors of a future recession. Ycharts has a US recession probability chart based on this concept that currently stands at 67% odds of recession forming over the next year.

Yet even in light of that ominous picture, the S&P 500 (SPY) is on a strong run. That’s because we have all heard about the possibility of recession…which keeps NOT happening. This has created an impressive FOMO rally that is pressuring those with a bearish bias to give up hope.

Will that rally continue after the Fed meeting?

The answer to that depends on whether the Fed agrees with investors about the accelerating improvement on the inflation front found in July’s CPI & PPI reports. Or do they continue to see inflation as too sticky in places like labor and shelter and thus want to keep raising rates to put a stake through the heart of high inflation once and for all?

Any dovish tilt in their language will be celebrated with more buying activity. But given this is fully expected, as proven by the strong running rally in hand, then a hawkish Fed sticking to their guns could spark a long overdue pullback.

No…not return to the bear market. Not a full blow correction either. Just a healthy pullback of 3-5% where some of the recent excess profits are taken off the table.

This is not a tradable event. As long as we are above the 200 day moving average, then no need to be out of stocks.

Rather, it creates a trading range environment where folks with a notable advantage can still squeeze out profits. And yes, our reliance on the POWR Ratings is a proven advantage that should continue to keep us in good stead.

Price Action

As noted above, and shared in my 2023 Lessons Learned commentary from last week, we will be simplifying our market timing approach. That is accomplished by a focus on the 200 day moving average for the S&P 500 (SPY).

Plain and simple we will be bullish above that mark and bearish below.

You can see how strong the recent bull run is by seeing how far above the 200 day moving average (red line) we are at the current time. But even the 50 day (yellow) and 100 day (orange) are quite below the current action.

As noted a little earlier, a stubbornly hawkish Fed on Wednesday could spark a quite normal 3-5% pullback. That would still have us well above the 100 day with little reason to fear of further downside to come.

However, if the Fed stays hawkish + fundamentals begin to darken showing the recession may be nearer at hand…then I may not wait til we get all the way down to the 200 day moving average before taking more defensive maneuvers.

No, I will not be getting short unless we are under the 200 day moving average. But indeed could put a bit more cash on the sidelines if these dark storm clouds start to form.

Until then it is fair to assume we are still very much in a bullish environment. Just believe that investors should take some profit on the Magnificent 7 and other overpriced AI/tech stocks and put that money to good use in more attractively priced investments. And that creates a good segue to the next section…

What To Do Next?

Discover my current portfolio of 5 stocks and 4 ETFs that were handpicked for the Reitmeister Total Return portfolio to outpace the market in the weeks and months ahead.

This is all based on my 43 years of investing experience seeing bull markets…bear markets…and everything between.

If you are curious to learn more, and want to see my 9 current trades, then you need to…

Start a 30 Day Trial to Reitmeister Total Return >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares . Year-to-date, SPY has gained 19.99%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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