Momentum Monday - Interest Rates Pushing The Markets Around

Interest rates and the US Dollar have been rising for most of February. Most stocks have been in a pullback mode for most of February. The current destiny of the market depends on inflation expectations. The latest CPI, PPI, and PCE reports show that inflation is slowing down but not fast enough. This combined with a still very low unemployment rate gives the Fed all the reasons to continue to raise interest rates and keep them high until something breaks badly – the stock market, the economy, the employment rate, or inflation.

The silver lining of this earnings season is that we saw many tech companies releasing lackluster reports and their stocks still went higher; at least initially. Many of them have already given back the majority of their earnings rallies in the past 2-3 weeks. Some examples – RBLX, MSFT, MBLY, ROKU, ETSY, ON, TTD, ABNB, AMD, NFLX, TWLO. This is not how new bull markets behave.

The S&P 500 and the Nasdaq 100 are sitting right near their 200-day moving averages. This is a make-or-break point for the indexes and many stocks because the market direction currently impacts 80-90% of the stock moves.

If interest rates continue to go higher, most stocks will be under tremendous pressure, especially tech and retail stocks. Higher interest rates eventually mean slower consumption and growth; therefore basic material and energy stocks are also not immune in this environment. Financials might do initially well but prolonged higher interest rates will eventually lead to less business for them and more delinquencies. Everything is connected. Everything depends on the interest rates right now in the mid to longer-term perspective. Anything is possible in the short term which is ruled by the sentiment of the day.

It seems the market had its monster rally in January and it now needs time to consolidate and digest while waiting for the Fed’s next move. Will they be as aggressive in their actions as they are with their words? In such an environment, one has to remain nimble and willing to change directions and positioning often. Everyone prefers to simply allocate their capital to a few strong stocks and ETFs and let them ride. This approach only works in a certain market environment and I am not sure we will be one for the foreseeable future. It is way more likely to continue to have 4 to 8 weeks of strong rallies intercepted by major rug pulls and selloffs that shake many out.