Stocks Run Up Into Earnings Season As The Fed Considers Pausing

Fed officials are preparing to slow interest-rate increases for the second straight meeting.

They could begin deliberating how much more softening in labor demand, spending and inflation they would need to see before pausing rate rises this spring. https://t.co/I2baGj3aGT

— Nick Timiraos (@NickTimiraos) January 22, 2023

Stocks are bouncing hard into the start of 4Q22 earnings season as investors anticipate the end of the Fed’s rate hiking cycle. The Fed Whisperer Nick Timiraos had a must read article on the front page of today’s Wall Street Journal in which he said that the Fed will raise 25 basis points on February 1 and start to deliberate about when to pause rate hikes entirely. As you can see in the chart of Fed Futures above, investors are currently putting a 99% probability that the Fed will hike 25 basis points on February 1.

My concern is that investors are thinking like this:

• The Fed rate hikes to counteract inflation caused the bear market.
• The rate hikes have cooled inflation so the Fed can stop hiking rates.
• Therefore, the bear market is over.

While this appears to be a syllogism it is in fact not. What investors aren’t considering is the effect all this Fed tightening will have on the economy. As we all know, monetary policy acts with a lag and we’ll only understand its impact over the course of 2023.

Therefore I took the opportunity this morning to lighten up on the long side by selling the Tesla (TSLA) shares I recommended and bought a month ago for an almost 30% profit. You might want to consider using this rally to prune your portfolio a bit too.