The Magazine Cover Indicator | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Fed Pauses Rate Hike Campaign

As was widely expected, the Federal Reserve decided not to raise its key interest rate target at its meeting earlier this week after hiking rates at every meeting going back to March of last year.

While our central bank allowed for the possibility of further rate increases going forward, it seems likely we may stay on pause for the rest of the year given improving inflation metrics.

Since monetary policy takes time to fully work through the financial system, Fed governors want to take some time to see the effects of what has already been done, so as to not risk pushing the economy into a deep recession.

At least from the stock market’s perspective, it appears that the Fed has successfully threaded the needle almost no one thought they could, tightening monetary policy just enough to cool inflation without causing severe economic pain.

Now that the bulls are on parade and valuations are nearing their 2021 peak, the market could be a bit more vulnerable to a downside surprise should anything not go according to plan.

Featured Insight: The Magazine Cover Indicator

Everyone can be a sucker for a good cover story from time to time, right?

So when this past week the popular investment publication Barron’s put a picture of a bull on the cover with the headline “This Market Has Legs”, people took notice.

Perhaps they’ve been worried about the pending recession people have been talking about, and now they feel more comfortable putting money to work in stocks since the experts are giving their stamp of approval. In fact, the percentage of bullish investors did jump from 29% to 44% just in the past week according to the American Association of Individual Investors survey.

The problem is, once the story is on the cover, the big gains have usually already taken place. You make money buying low and selling high, not buying after we’re already up 15% so far this year.

If you see a bullish cover story on a nonfinancial publication like Time or Newsweek, then you’ll know to be cautious, as those tend to be very contrarian indicators.

Looking Ahead: Will Earnings Deliver?

The second quarter of 2023 is fast approaching its end, and soon another earnings season will be upon us.

The market already expects earnings to be roughly 11% below last year’s second quarter, so that will likely be a rather easy bar to jump over.

Third and fourth quarter earnings estimates have also been inching lower, but overall, earnings are expected to be relatively flat in the second half of 2023 versus 2022.

It would seem that given the persistent rise in the S&P 500 index in recent weeks, markets are expecting an inflection in earnings revisions going forward – in other words, they are expected to start rising again.

We will soon find out if markets have a crystal ball into earnings, otherwise, they will be in for a rude awakening.

Copyright 2024 The Business Journal, Youngstown, Ohio.