Since the Great Recession in 2008-2009, the single best piece of investing advice has been 'don't fight the Fed.' As long as the Fed kept interest rates lows and promised endless economic accommodation, then stocks had no choice but to continue higher. Many market commentators have been predicting the easy Fed policies would eventually lead to disaster, but they have been saying that for a decade and have been proven wrong over and over.
Last week, Jerome Powell made it clear that the Fed is concerned about inflationary pressures - they may not be quite as transitory as characterized previously - and potential interest rate hikes are now coming sooner than expected. This news isn't too surprising. Shortages, price pressures, and the tight labor market have been obvious, but the Fed's acknowledgment of it was a shift, and that caused a market reaction.
The indices broke some key support levels, and there was a sharp rotation out of commodities, financials, value, and a variety of other sectors, but growth and some speculative names held up well.
The big question now is how does the market digest higher rates. Part of the reason rates and inflation are going higher is because the economy is doing well. That will eventually be reflected in the bottom line and favors fast-growing growth names, but companies will also see higher interest costs hit their bottom lines eventually, and the huge wave of liquidity that the market has been riding for so long will likely slow.
The important issue is that there will be winners and losers as the market shifts to deal with inflation and interest rates. On Friday, for example, while the DJIA was down 1.7%, the ARK Innovation ETF (ARKK) , which is comprised mostly of high-growth names, managed a gain of about 0.3%. ARKK has been hit hard since mid-February as the DJIA held up well, but now that rotation is reversing as higher rates are seen as favoring growth.
We'll have to watch price action and sector action in order to effectively navigate this market, but there are a couple of other areas of interest. Bitcoin is taking another hard hit as China is putting more curbs on bitcoin mining. Some key technical levels are falling, and gains for the year are disappearing fast. This will hurt speculative trading in cryptos but could be helpful for speculative and 'meme' trading, which can be high risk but have more intrinsic value than cryptos.
Another issue this week is that the Russell Indices are rebalanced at the close on Friday. There will be some huge blocks, and it might be the highest volume day of the year. There are about 250 stocks being added and an equal number being dropped. Many of them will have unusual volume this week but be careful as this action will not be sustained.
My game plan is to watch the action and see how it impacts individual stocks and sectors. I don't want to be too caught up in guessing the direction of the indices as the opportunities will be found in trading individual stocks.