Stocks Run Up Into Earnings Season As The Fed Considers Pausing

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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.

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