Don’t Let the October Stock Market Rally Fool You

In a world where short-term traders hang on every word coming out of the Fed, yesterday’s FOMC meeting and post-meeting conference call did not disappoint!

The market was expecting a 75-basis-point increase in the federal funds rate (the overnight interbank lending rate), and the Fed came through with that.

The bullishness of late October, which led to a 14% rise in the Dow for the month in spite of the anticipated rate hike, was predicated on one thing…

The Fed pivoting to recognize that it takes time for the results of rate hikes to be visible – just as it takes time for rate lowering to show up in the economy. This is called the “lag effect.”


Well, the Fed did just that. Here is what their statement said about future rate hikes:

“The Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

All good. The market took off and investors celebrated. I closed out a put hedge on the S&P (which was the wrong move, in hindsight).

Then Fed Chairman Jay Powell began his press conference and Q&A session. He almost looked unhappy that the market was heading higher.

He decided to contradict the Fed statement by saying that rates would still go higher for a while and that it was way too early to think anything different.

Here’s what he said:

“We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

The market proceeded to tank and tank hard, quickly reversing its course from just a few minutes earlier (just like our new Lead Technical Tactician, Nathan Bear, predicted). The lesson here is that the market is in very unpredictable times and the Federal Reserve is hell-bent on making sure the market stays in check. This is exactly what I told my Twitter followers the night before the meeting:

Karim's tweet: JPOW is in a difficult place. He hates the 12% rally we're in the middle of. The Fed does not want to be seen as encouraging the stock market. They want a reverse wealth effect to confront inflationary pressures.

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