The Fed Did Not Flinch
What is it?
Last Wednesday the U.S. Federal Reserve announced that they are raising interest rates by another 25 basis points or 0.25%.*
Why does it matter?
Before the announcement markets were optimistic that the Fed may pause interest rate hikes. That was because of the recent volatility in bank stocks as mentioned in a prior market insight. If banks began to limit access to credit then they may be able to help the Fed in their attempt to bring down inflation. Markets were calm before the Fed’s announcement. However, the Fed remained hawkish and mentioned that the banking incidents were special cases as opposed to a systemic issue. There will be improved oversight on banks and similar companies to ensure investor confidence in the markets is sustained long term.
Markets did pop up right after the announcement, but ended the day notably lower. The financial sector of the U.S. economy was hit hard. While it did have a slight bounce it is still under pressure as investor sentiment wanes and interest rates rise. International markets did not fare much better as the uncertainty spread globally with little news to prop up prices. If market volatility remains high we could see a move lower. We feel confident in our positioning and our ability to adjust to changes in the markets. We are maintaining a risk-off approach. If volatility declines and performance starts to improve then we will be more likely to add risk exposure to the portfolios.
Last week we added to some positions that are not being directly impacted by the banking collapse. We are seeing some opportunities in equities that are oversold on a short term basis. Lastly, we took some profits on positions that are signaling overbought.
Small Cap Stocks Suffered
What is it?
The largest companies in the U.S. are seemingly overbought at the moment. There has not been much traction for the smaller companies as investor confidence is low at the moment.
Below is a chart that shows the Dow Jones (large companies) in blue and a Russell 2000 ETF (smaller companies) in red. This is data from February 27, 2023 until the 22nd and 23rd of March for the Russel and Dow, respectively.
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The Dow was down 2.2% while the Russell lost more than 10% over a similar time.
Why does it matter?
Investors are looking for safe investments that could still appreciate over the long term. They feel good about investing in big-name companies as those stocks have outperformed on a short-term basis. While small cap stocks are underperforming we still see value in them, especially in some sectors. The big-name companies are signaling overbought so we do not plan to add to them until things change. This would be reflected in our Tactical All-Stars model. That model takes some of the biggest names from each sector. If markets fall we would look to buy into these mega-cap stocks when they are at more reasonable prices. While we are maintaining a risk-off approach, there are some oversold small-cap stocks that we recently added to our portfolios. The Tactical Farm Team model uses companies from each sector that are not as large as the All-Stars. We see an opportunity in the investments we recently added to appreciate on a short-term basis. The plan is to manage those positions in a way that gives them room to go higher long-term and limits the downside loss. We will be buying or selling based on how they perform over the next few weeks.
Other articles we found interesting this week:
David Tepper Remarks “Contracts are meant to be honored” in reference to Credit Suisse
TikTok CEO fails to convince Congress app is safe
US Dollar stabilizes ahead of key data releases
Current 401(k) portfolio
Our last 401(k) portfolio reallocation: 5/19/2022.
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The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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Sources:
*Scott Horsley. “The Fed raises interest rates again despite the stress hitting the banking system”. 3/22/2023. NPR. https://www.npr.org/2023/03/22/1165274305/the-fed-raises-interest-rates-again-despite-the-stress-hitting-the-banking-syste
**Yahoo Finance. “Dow Jones Industrial Average (^DJI)”. 3/24/2023. Yahoo Finance. https://finance.yahoo.com/quote/%5EDJI?p=%5EDJI
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