How To Profit From The Fed’s Next Decision?

We believe Chair Powell and the Federal Reserve’s next move will not be pivotal. There is an opportunity to step back, see the bigger picture — and potentially take advantage of that.

Specifically, the Fed’s upcoming move from the two-day Sep 17th and 18th, 2024 meeting, could go one of three ways.

[1] Reduce rates by 25 bps, with a weak statement about future cuts

[2] Reduce rates by 25 bps, with a strong statement about more cuts to come

[3] Reduce rates by 50 bps

Option 1 is a less likely scenario right now. Option 2 and 3 will be cheered — in spirit and action. 

Markets won’t respond well to Option 1

We’ll see a moderate drop in S&P and other major indices, likely less than or around 5% levels, and hopefully not more than 10% levels — and very unlikely a market crash. However, this can easily deepen in the near-term if additional weaker jobs reports show up, or companies report weak Q3 earnings in October — especially if, in addition, inflation continues to show upward bias. In either case, we believe such downswings, if they happen, present a buying opportunity (how low can stocks and ETFs/indices go — from SPY vs. AAPL, to pharma giant Merck, which stocks dropped most during past market crashes?). At the least, we believe investors will be better off not being too reactive. 

Why is that?

Here’s the thing. Irrespective of what the Fed does as part of their next move, there is little doubt about one thing: this is a data-driven Fed. If they make a smaller 25 bps cut to start, and unemployment data continues to show deterioration, they’ll make bigger moves. This Fed has managed inflation, no, a monstrous 8%+ inflation, and restored price stability to 2-3% levels, without killing the job market. They did it extremely well. The Fed has “0” interest in messing with the success they’ve seen. Chair Powell knows well, now — at this juncture — the risk to job growth and unemployment is real, the risk has shifted — it is no longer weighted towards a runaway-inflation, instead unemployment growth is the risk. He said as much in the last meeting.

Point is — even if the first move is a 25 bps cut, if, and as more data comes in, the Fed will act with 50 bps cuts, and maybe larger cuts. The Fed will do whatever is needed to ensure a soft-landing. 

The Fed’s on your side. Period. If you agree, then isn’t this, and more so if there is a drop in markets, the time to buy?

So now is the time for investors — to invest in technology, infrastructure, better health outcomes — better protection and preparation for the next Covid? Sure, invest in Nvidia, other AI stocks — SMCI (what’s a better AI stock SMCI or Nvidia?), invest in Lilly’s weight loss drug’s success, and DNA/CRISPR tech, Moderna, the new infrastructure projects, Google and Waymo’s self-driving efforts, and GE, and everything in the middle? And if you don’t like the rollercoaster, invest in the S&P 500, or, learn how the select 30 stocks that make up Trefis High Quality portfolio (HQ) strategy has outperformed the S&P 500 — consistently. HQ has seen >80% return since its Sep 2020 inception, Hint: it’s simple, and right there in the HQ strategy’s performance metrics — not just size, but defensible revenue growth, and margins, but companies with strong balance sheets, and other quality criteria.

So, is anything to be feared at this time? While in the medium-to-long term things should do well, near-term volatility is likely to persist. Right now, we see this mostly due to the geopolitical unrest, the middle-eastern Gaza conflict, Ukraine/Russia war, and their potential for accompanying destruction. Why? Well, for one, wars are like that. They’re an extreme of human expression — creates more opportunity for results in the long tail. By definition, more volatility, less control, more uncertainty — more risk. If that’s how you see risk. Let’s not forget, there is an upside as those conflicts wane and normalcy returns. Not just a psychological upside, but a real flow of goods and services as supply chains become less risky, shorter paths to trade, reliability, and trust develop.

Though it’s good to be hopeful, the overhang from wars and conflict isn’t going away, not anytime soon. On the flip-side, markets seem to have settled-in with these conflicts. And things can get better. 

The other risk — and always is — is default on loans. All market crashes happen because someone can’t pay back their loans (5 largest market crashes compared). For one, commercial real estate has been suffering for a while, Covid’s work-from-home gift was a big curse for the Retail and Office real-estate parts (big variety in real-estate sector). In addition to an altered demand landscape, commercial real-estate loans maturing near-term continue to face high rates, and tough refinancing conditions. Things could break, though that hasn’t happened — and with Fed rates finally on the downtrend, it’s less likely. Finally, there’s consumer defaults — credit card, auto loans — especially credit card loans. That makes the financial sector — banks like JPM, Citi, and BofA, with large credit card books, vulnerable (How low can JPM stock go in a market crash?). Again, we see this risk only as a transient — because we believe the Fed will do whatever it takes to create a soft-landing.

There is something else. With rates as high as they are — the Fed has even more power. There is a lot of room to cut rates, and release more liquidity if things go south. They can do a 100 bps cut. Power to release more money if the economy needs a shot for some reason, for any reason.

We believe, on balance, though the short term is likely to be volatile – there is a higher chance of more favorable market conditions in the medium term, and that’s good for investors.

We’ve developed Trefis strategies to take advantage of such opportunities, while carefully managing risk in developing our Trefis portfolio strategies. 

Here’s more about Trefis market beating portfolios.