Markets Seem To Expect A Rate Hike This Week
Inflation data spooked markets into pricing in a rate hike at this week’s FOMC meeting. Futures on this week's rate hike odds have moved higher to an 87% probability.1 The
Producer Price Index came in as expected month-over-month at +0.4%2, but the year-over-year reading was +5.4%.3 After two consecutive months of considerable decline, PPI reared its ugly head yet again. The main culprit - oil. The price of oil was higher in August,4 but more to the point, the price of Diesel Fuel was higher by 35%, reaching an all-time high of $73/barrel.5 If the Fed is determined to take a slow approach to rate hikes moving forward, equities tend to react relatively calm (as represented by the black line in the graph above). However, if the Fed takes a relatively fast approach to hiking rates, equities tend to perform poorly (as represented by the orange line above). It's possible the language the Fed uses in this week's rate decision could be more important than the actual rate decision itself.
Equity concentrations and AI financials are at levels that investors might want to consider. As we stand here today, some of the hyperscalers - Amazon, Google, Meta,
Miscrosoft, and Oracle have negative forward free cash flow. In fact, according to J.P. Morgan, hyperscalers aren't expected to turn free cash flow positive until 2028.6 The S&P 500 Index is concentrated at the top, with at least 38% in the top 10 holdings of the index.7 However, it isn't just the U.S. that is concentrated. The graph shown here displays the concentration in the top 10 holdings of indices in the Emerging Markets (38%), EuroZone (30%), and Japan (30%). With these concentration levels, it may only take a catalyst to cause a reversion to the mean.
Historically, markets tend to follow cycles, albeit, imperfectly. Over the 80 years of market history, the S&P 500 Index tends to see pull backs when it experiences at least
three consecutive years of double-digit returns. In two of those instances - 2015 and 2022 - markets retreated after the third consecutive year of +10% returns (as shown in the graph). In two other instances - 1946 and 1953 - the market pulled back after the 4th consecutive +10% year. Only once - 2000 - did the market make it to 5 consecutive +10% years before pulling back. No one knows how markets will perform in the future. However, given these cycles, investors should assess their portfolios and adjust their allocations according to their respective long-term risk tolerance.
Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
Past Performance does not guarantee future results.
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