Don’t Fight the Fed
Happy new year!
As we dive into 2023, let’s get right into how to play the Federal Reserve.
First, it’s important to know that basing your SHORT-TERM actions on what the Federal Reserve is doing is one of the oldest strategies on Wall Street.
So if the Fed is lowering rates, you should go long on growth stocks, and if the Fed is raising rates, you should go long on value stocks.
And if you really want to go to town, you should short growth stocks when the Fed is raising rates and short value stocks when the Fed is lowering rates.
Those are the short-term options.
You see, when the Fed is raising rates, businesses contract.
Growth stocks contract the most, as their growth is usually fueled by cheap money. To combat the lower growth, they slash overhead.
This makes them leaner for the longer term, and that is why they should actually be on your radar when the Fed is raising rates.
But… having them on your radar is not the same as buying!
To decide when to buy, you have to wait for the signal that the Fed is sending you. That signal is not when they stop raising rates. By then, everyone will already be investing in growth.
No, the signal that you should be buying stocks like AMZN, GOOGL, MSFT, ORCL, DDOG and SNOW is the unemployment rate ticking up for at least two months.
That is what the Fed is targeting. Sure, they talk about inflation, and it is high on the list. But they know that the only way to combat inflation in this cycle is to slow job growth – and if it reverses to job cuts, that’s even better.
So, while everyone else is watching inflation reports, you should be watching employment reports!
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On the flip side, what you want to be buying right now are fixed-income plays. Not the one- or two-year stuff. Sure, it looks attractive because the short-term stuff moves in lockstep with the Fed… For example, if the Fed is targeting 5% for its benchmark rate, then one- and two-year Treasurys will pay 4.8% or more.
But then what? What happens when the Fed stays put or starts to lower rates?
You’ll be stuck in two-year paper.
Instead, you should be laddering your fixed-income investments. And next week, I will show you exactly how to do that in this market!
P.S. Next week, my colleague Bryan is going to show you the single most powerful tool on the planet for making trades. This technology is 20 years in the making and could help accelerate your success in these markets. You’ll see how it works LIVE on Wednesday, January 11, at 2 p.m. ET.