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2 reasons why stocks might move higher despite the Fed hiking rates

Mircea Vasiu

Financial markets await the Fed’s decision scheduled later today. While the Fed will most likely hike the rates, are there any reasons to still buy stocks? 

The most important event for financial markets is about to start later today in the North American session – the Fed’s statement and press conference. Much has been written ahead of the event, such as the Fed being behind the curve.

After all, inflation runs at 40 years high, yet the federal funds rate is close to zero.

Stocks declined in 2022 but found support recently. That is, despite everything going on in the world, such as rising inflation and war in Europe, stocks are resilient. Here are two reasons why it is so: the rate hike and a lot of bad stuff are already priced in.

The rate hike is 100% priced in

Let’s start with the rate hike. During the last testimony, Powell said a 25bp rate hike is favored. Thus, it is already priced in.

Inflation is what keeps the Fed awake these days, and it is likely that it will be mentioned several times during the press conference. So where can the Fed surprise?

In the dot plot projections.

If the Fed does not increase the dot plot projections by how much the market expects (e.g., median 4 hikes instead of 5 expected), then the stocks should rally despite the rate hike. Thus, this 25bp should be viewed as a dovish hike.

A lot of bad stuff priced in too

Plenty of bad news circulated around from a geopolitical perspective. Moreover, inflation runs very hot.

As such, the Nasdaq 100 index fell into the bear market territory. There is also a death cross on the S&P 500 index (i.e., 50-day moving average drops below the 100-day moving average).

Moreover, consumer confidence is the lowest in 10 years. Furthermore, a survey run by the Bank of America shows that global fund managers sit on a pile of cash, underinvested.

Hence, with all this uncertainty hovering, the stocks may bounce for the simple reason that all of the above are already known. And yet, stocks are resilient.