[TOPIC] Fed Crushed Market; But SPX. Up Even With 20% Rate?
US stocks experienced roller coaster last night.
- $NASDAQ(.IXIC)$ closed down 1.79% at 11220.19, a new low since July 1;
- $S&P 500 (.SPX)$ was down 1.71% at 3789.93, a new low since June 30;
- $Dow Jones (.DJI)$ was down 1.7% at 30183.78, a new low since June 17.
1. Dot Plot Shows More Rate Hikes Than Expected
Powell's rhetoric was very hawkish, showing a determination to lower inflation.
I wish there were a painless way to get inflation down, but there isn't.
According to the latest dot plot, after the 75bps increase in September as expected, the benchmark rate is expected to reach 4%-4.5% at the end of the year, much higher than the 3.4% expected in June.
Based on this plot, Fed will have to raise rates by another 125bps by the end of the year, with the first rate cut to wait until 2024.
Let's look at analyst's expectations:
2. More Rate Hikes Necessarily Means Market Crash?
The market plunged mainly because the benchmark rate increased, and the expectation of a rate cut next year was crushed. So how will US stocks perform when more rate hikes are ahead?
Let's look at the historical performance during the Great Inflation when Volcker, the Fed chairman, raised the fund rate to 20% (compared to the current 4.5% expectations).
1) Generally speaking, $S&P 500(.SPX)$ did fall into a bear market during this decade.
2) But the greatest decline was not in the period when interest rates peaked (20%), but during the previous cycle of rate hikes.
After all, the stock market is about expectations. The market crashed when the rate was raised to around 15%, but continued upward momentum when the rate was increased to 20%.
But the question is we don't know we are in the 1st or the 2nd cycle. It's hard to predict the market.
Do you think the stock market will rebound after the fear sentiment passed?
How do you comment on Volcker's aggressive rate hikes?
Will we repeat the Great Inflation?
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