Fed Gets Aggressive On Inflation And Market Rallies
Today the Federal Reserve raised the Fed Funds Rate by 75 basis points, 25 basis points higher than they originally announced at the May meeting. With stubbornly high inflation, the Federal Reserve was clearly behind the curve, and today, they made a significant step forward. The Federal Reserve is taking the most aggressive policy stance in decades, and the U.S. Stock Market rallied on the news.
While we are happy to see a relief rally, we think it may be just that. The markets are still searching for the bottom. When you go through a bottoming process, it does not occur in a linear way. There is no straight down, hit bottom, and then rebound (at least not without extreme Federal Reserve intervention). It is more like dropping a ball. The first drop has a lot of velocity and shakes out a lot of investors, then it comes up again not quite as high as it started, and then drops again with a little less energy shaking out a few more investors. It continues in this fashion until, on the last drop, the volume of sellers is low, and the ball comes to rest. That is a bottom.
Financial markets are forward-looking, so price-based or technical, indicators are likely to be the first to signal the downtrend has turned into an uptrend. Typically, the market follows a four-step bottoming process:
- Oversold—the market sell-off gets extreme.
- Rally—the market stages a rally off the lows.
- Retest—the market pulls back to retest the lows.
- Breadth Thrusts—an extremely high percentage of stocks rallying together is called a breadth thrust which leads to a sustained move higher.
The last five days of selling were significant. But it is too early to say we have achieved step one on the list. If today’s rally continues in strength and breadth, that will be a good signal.
In the meantime, the Federal Reserve’s action today was a good step forward in reining in inflation.