The market has been down big since the CPI report on Friday. The Nasdaq is down over 7% and the S&P 500 is down over 6%. This is a natural reaction to the realization of greater than expected inflation, because in the minds of Wall Street it means the fed is more likely to be more aggressive in its rate decision on Tuesday and Wednesday. Essentially, the sell off is the market telling us that it expects the fed the act more aggressively at the FOMC meeting.
We have been adamant in our belief that the fed will do everything in its power to keep investors believing in its ability to fight inflation whilst also raising rates as little as possible, because if they get too high the interest payments on the national debt can consume the whole economy. For this reason, we believe that the fed’s position will not change this week. Following an unchanged fed, the market will likely rise again as buyers will come in and sellers will halt their selling.
The reason for the big declines in the markets in the past two days is due to a simple concept. In a situation where the fed is expected to hike rates across the next year, but the amount of rate hikes is unknown, investors will never want to buy anything during the days leading up to the FOMC decision. If you add in the terrible CPI numbers on Friday that instilled fear and panic in investors that hadn’t expected it, you get a large decline in a short period of time caused by a lack of buyers and an influx of sellers.
We don’t usually make extremely short term trades like this, especially one right before a FOMC meeting, but we believe the risk to reward level is worth it here. We have taken small positions in the SPDR Gold Trust and the Nasdaq 100 that we will be closing out after the fed’s interest rate decision and consequent discussions. We may be wrong, the fed may put on a tougher face this week, but the probabilities state otherwise.