Yesterday, Jerome Powell and the Federal Reserve tried to play the Grinch and steal Christmas from investors.
But the central bank was unsuccessful. Instead, it may have accidentally given investors the best gift for 2023: a brand-new bull market.
Here’s the story…
The Federal Reserve hiked interest rates by 50 basis points yesterday. That was widely expected. But it also dramatically increased its forecast for rate hikes and inflation in 2023. That wasn’t widely expected, and it caught the market off-guard. As soon as those projections came out, the S&P 500 plunged to a 1.3% loss on the day.
But stocks didn’t stay down for long.
The market spent the rest of the day clawing back those losses. At one point, stocks were green on the day! Meanwhile, the market’s volatility index, Treasury yields, and the U.S. dollar – all of which spiked after the Fed’s announcement – all ended the day lower.
In other words, across all major financial assets, the market reacted sharply negatively to the Fed’s announcement. Then it spent the rest of the day reversing course.
Because Mr. Market doesn’t believe the Fed.
The Fed’s trying to be the Grinch. But the market sees Santa Clause – and that could spark a big new bull market breakout in 2023.
The Tough Talk Is Just Talk
The Fed’s talking tough right now. It’s saying that inflation is still hot and that it needs to stick with its rate-hiking program to achieve price stability.
But that’s what it has to do. If the Federal Reserve doesn’t talk tough, its rate hikes won’t work. It has to talk tough right now.
That’s why you should listen less to what the Fed has to say and pay more attention to what it will actually do.
What the Fed will actually do is determined by the data. And the data strongly suggests that a pivot is on deck in the first quarter of 2023.
Indeed, all the incoming economic and financial market data strongly suggests that the economy is slowing, inflation is crashing, and the labor market is starting to crack. That means the Fed will pivot within the next three months. Yet, the central bank continues to play “tough guy” by pointing toward further rate hikes in 2023.
In other words, everything except the Fed’s own rhetoric strongly suggests a pivot is coming in the first quarter of 2023.
For example, let’s look at the inflation data.
Inflation peaked 22 weeks ago in June 2022. Did you know that, on average, the Fed’s last rate hike happens about 22 weeks after inflation peaks?
In other words, it would be historically appropriate for yesterday to have been the Fed’s last rate hike in this cycle. And it would be historically unprecedented for it to keep hiking aggressively into 2023.
Fed Pivot Is Imminent
Also, inflation didn’t just peak a while ago. It has dropped significantly from the peak, with headline CPI rates down about 200 basis points. Over that same time frame, the Fed Funds rate has gone up.
That’s pretty unusual. When inflation drops, the Fed Funds rate normally does, too. Whenever you get periods wherein inflation drops but the Fed Funds rate doesn’t drop (like we’re seeing right now), what comes next is always either a pause in hikes or rate cuts.
The data here is shockingly clear.
The Fed will pivot in the first quarter of 2023. Forget what it’s saying. Pay attention to the data. The data says inflation is crashing in a manner 100% historically consistent with a pivot over the next three months.
Wall Street knows this. And that’s why yesterday’s negative gut reaction to the Fed announcement was short-lived. It’s also why stocks will soar next year.
The Final Word
The stock market has fallen hard enough to depressed enough valuation levels in 2022 that it is just a few catalysts away from a massive rebound in 2023.
Specifically, if inflation keeps falling and the Fed pivots in 2023, the stock market will soar.
This week, we got confirmation that both will very likely happen. Inflation is crashing right now. And the Fed – while sounding hawkish – is leaving the door open to pivot if inflation keeps dropping.
Falling inflation plus a dovish Fed pivot will equal massive stock gains in 2023.
We’re getting prepared for a stock market boom.
And the best way to get prepared is to compile a portfolio of the best stocks to buy for 2023. So, together with my InvestorPlace colleagues and legendary investors Louis Navellier and Eric Fry, we built that very portfolio just two days ago.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.