Fed rate decision on tap tomorrow as traders and investors brace for heightened volatility as talk of a PIVOT fade. Also, there is a ton of data to come out before the next Fed meeting on Dec 14th. So, who knows which way the wind will blow.
Hot or Cold
The current market narrative is either anticipation of a bullish Fed PIVOT or keep hiking until inflation is dead and the economy slides into a recession. One good for risk assets, the other not. Certainly, since the horrid Oct 13th CPI release (+8.2% YoY) it seems pragmatic to continue to stick with a defensive posture for long-term portfolios even as stocks have rallied.
Back on Oct 4th I suggested a tactical long position to capture the bear market bounce. The trade turned out to be a great idea but bad on timing. The Oct 13th CPI driven massive reversal stopped out the position while I was away on vacation. Oh well, you win some and you lose some, that’s trading!
S&P 500 Index ETF – SPY
Rearview thinking
I find it amazing that the Fed uses lagging indicators to make policy. For example, the Fed uses core PCE to define inflation and the unemployment rate (UR) to gauge the labor market. Both data series lag by about 6-12 months. Unfortunately, this raises the risk that something will break! Driving a car using the rearview mirror is never a good idea.
Final thoughts
Moving forward it makes sense to hold a neutral tactical view and see how tomorrow’s Fed interest rate decision unfolds. Things look a lot different from a few weeks ago, stocks have rallied ~+9% on TALK of a Fed pivot, nothing more. Maybe tomorrow we’ll get something big from the Fed, but I get the feeling the presser will have a feel like Jackson Hole – prepare for higher rates not higher stock prices!
The best long-term asset allocation remains a defensive one overweight cash and short-term gov’t bonds. As for risk assets and alpha generation, my long-term view favors high dividend payers like Enbridge and BCE. As always, risk management is key to survival. Always have a risk management framework in place regardless of your investing style.
Thanks for reading!
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