Last week there was a meltdown in Big Tech companies after tepid September quarter earnings. Markets next look forward to the November Fed meeting which is scheduled for this week.
Big Tech companies with the notable exception of Apple disappointed markets with their earnings last week. While the wider markets closed in the green, there was a meltdown in tech names. Together, Alphabet, Meta Platforms, Microsoft, and Amazon lost $350 billion in market cap last week.
Apple however soared on Friday and had its best day since 2020. Warren Buffett had doubled down on Apple stock amid the market crash in the first half of 2022 and the bet seems to be paying off well. We have a guide on how to buy Apple stock for beginners.
Meanwhile, as the earnings season is now past its peak, markets would next look forward to the Fed’s meeting on November 1 and November 2. Since last July, the Fed has spooked markets with its actions as well as its commentary.
It started with the release of the Fed’s July meeting, where the commentary was more hawkish than expected. In August, speaking at the Jackson Hole Symposium, Fed chair Jerome Powell dashed all hopes of a Fed pivot. The US central bank raised rates by 75 basis points in September. While the rate hike was in line with expectations, the commentary was quite hawkish.
The September dot plot showed that FOMC (Federal Open Market Committee) members raised their median 2022 interest rate forecast to 4.4%, which was 100 basis points higher than what it was in June.
Fed Has Taken a Hawkish Stance to Curb Inflation
The Fed has taken a hawkish approach to curbing inflation which is still way above comfort levels. After the Fed’s September meeting, Powell said, “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
US stocks, especially growth stocks, have crashed this year amid the rise in Treasury yields. However, there are some investments that can outperform during inflation. Value and undervalued stocks have also outperformed the broader markets.
Amid the turmoil in debt markets, bond guru Jeffrey Gundlach is bullish on bonds and advises investors to invest in bonds. Treasury yields and prices are inversely related. A fall in bond yields leads to a rise in bond prices.
Markets Expect Fed to Raise Rates by 75 Basis Points in November
This is the penultimate Fed meeting of 2022. So far, the Fed has raised rates by 300 basis points, which includes three consecutive rate hikes of 75 basis points. Markets expect Powell to announce a 75-basis point rate hike in November also.
However, more than the rate hike, markets would watch Powell’s commentary on future rate hikes. The US economy is slowing down and even the tech majors are witnessing a growth slowdown. Almost all the tech companies are going slow on hiring and the outlook for 2023 does not look any rosier.
To be sure, even the Fed expects US unemployment rates to rise from the current levels. Fed’s rate hikes are only adding to the slowdown in the US economy.
On multiple occasions, Powell has said that the rate hikes might lead to recession. He also however emphasized that the Fed is not trying to force a recession. While recession impacts most sectors of the economy, some of the investments are largely recession-proof.
Watch Out for Powell’s Commentary on Rate Hikes
Goldman Sachs believes that Fed funds rates would peak at 5% in March. The forecast is slightly above what the September dot plot showed. While FOMC members see only one 25-basis point rate hike in 2023, Goldman Sachs predicts two 25-basis point rate hikes in February and March next year.
Meanwhile, there are some encouraging signs ahead of the Fed meeting. Inflation has come off its highs and wage growth has moderated. Rental growth has also come down and in some markets rent as well as housing prices have dropped.
However, the escalation in the Russia-Ukraine war has complicated the picture for central banks across the world. Russia has suspended the pact to let Ukraine export its wheat which has led to a rise in wheat prices, fueling inflation fears. Energy prices have also bounded back after OPEC+ decided to cut its output.
Overall, after the Big Tech meltdown last week, Fed’s November meeting this week might set the market’s direction.
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