To The Moon

After a prolonged period of raising rates, the Federal Reserve has decided to increase the rate one more time this month before indicating a possible pause in rate hikes.

In our previous post, we noted that the markets experienced a significant rally well before this event, starting from the beginning of the year. This was particularly noticeable in the tech sector, which had been adversely affected by the rate hikes. The Nasdaq 100 index showed a year-to-date increase of 26%.

Therefore, I believe that the market often moves ahead of the Federal Reserve. This could be due to insiders having prior knowledge or the collective wisdom of the crowd effect. Regardless of the reasons, it is evident that markets have a tendency to anticipate future events and are forward-looking in nature.

Using the Nasdaq 100 as an illustration, as it comprises mainly technology-oriented growth stocks and is highly sensitive to interest rates:

Displaying Sell in May and buy in...

The Nasdaq 100 index reached its lowest point on October 13, 2022. During this period, interest rate hikes were being implemented aggressively, with a consecutive increase of 0.75%. Market participants were uncertain whether the rate hikes would continue at the same pace. Despite this uncertainty, the market reached its bottom and began an upward trend. 63 days later, in December 2022, the Federal Reserve announced a slower 0.5% rate hike.

Likewise, the Nasdaq 100 index experienced a notable increase 35 days prior to the Federal Reserve's decision to reduce the rate hike to 0.25% in February 2023.

Furthermore, despite the occurrence of a banking crisis in March 2023, the index continued to rise, 51 days before the announcement of the final rate hike and signaling a pause.

The Nasdaq 100 index continues to ascend at present, indicating a potential reflection of the anticipated pause in rate hikes scheduled for June 2023.

Additional insight can be gleaned from the futures markets, where traders speculate on the direction of interest rates. Currently, the majority of bets suggest that rates will stabilize at 5% to 5.25%.

However, traders are anticipating a rate cut to take place in November 2023, as the majority of bets are placed on a range of 4.75% to 5%.

Displaying Sell in May and buy in...

Certainly, the Fed wouldn't lower rates without a significant development on the horizon. This could potentially indicate the containment of inflation and a slowdown in the economy. Alternatively, it could suggest that the banking crisis has intensified. However, we cannot predict these developments in advance with accuracy.

If this trajectory remains consistent, it indicates that the market's upward momentum may stall or potentially even decline between June and September. However, there is a possibility that the market could regain its upward trend starting from September, as it anticipates the potential rate cut. This anticipation typically occurs within a timeframe of 30 to 60 days before the actual rate announcement.

To put it differently, the markets might demonstrate positive performance this year, even if the real economy may not be faring as well, which could lead to the Federal Reserve cutting rates.

However, it's important to acknowledge that the market is dynamic, and these assumptions are subject to change as new developments arise. Therefore, paying close attention to and heeding the signals from the markets may prove more reliable than relying solely on our intuition or gut feelings.