Expect Long, Bumpy Ride As Fed Fights Inflation

The drawn out process of lowering inflation to acceptable levels is far from over.

That was the message heard around the trading world Tuesday following remarks by Federal Reserve (Fed) Chairman Jerome Powell.

Stock market participants appeared to only focus on the “lower inflation” part of the remarks and all three major indexes chopped around before bouncing higher on the day.

‘Disinflationary’ process underway, Fed says

Traders should not expect the Fed to cease efforts in battling inflation after “disinflationary” statements made headlines Tuesday.

“The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” Powell said during a question and answer session in Washington, D.C. “But it has a long way to go. These are the very early stages.”

The central bank chief made it clear that economic factors can shift Fed actions from soft to harsh as needed.

Last week the Fed raised the federal funds rate by .25% – lower than previously planned – based on slight decreases in inflation. But soon after on Friday the nonfarm payroll jobs report for January was released and the number of new jobs almost tripled expectations.

That prompted Powell to make clear plans for raising interest rates are still in place and there is the possibility that rate hikes could go higher if the job market doesn’t cool down.

“We didn’t expect it to be this strong,” Powell said. “If we continue to get strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”

Bumpy ride ahead before core inflation falls

Powell’s comments made for a choppy market throughout the afternoon before the market settled in for an overall gain.

In the market today, the Nasdaq jumped by 1.90% to 12,113.79 points to lead the indexes. The S&P 500 followed with a 1.29% spike to close at 4,164.00. The Dow rounded out the positive day by gaining .78% to close at 34,156.69 points (adding 265.67 points on the day).

The 25 basis points increase last week, the eighth increase since March of last year, boosted the federal funds rate within the target range of 4.5%-4.75%. The Fed goal is to get core inflation down to 2% and despite all central bank efforts core inflation hasn’t budged much.

According to the U.S. Bureau of Labor Statistics report in January, core inflation rose .3% in December, after rising .2% in November. Core inflation rose by 5.7% year-over-year in December.

Powell expects inflation will not be at an acceptable level until well into 2024 and the “disinflationary process” will be drawn out over time.

“It’s not going to be smooth,” Powell said. “It’s going to be bumpy.”

‘After tech’ earnings trades coming into play

As the stock market continues to digest Fed actions and intentions, the team at Simpler Trading keeps looking for the next opportunity.

Before and during the Fed meeting last week, traders were focused on quarterly earnings reports from high-profile technology companies. What many traders don’t realize is that big moves often hit the market after tech earnings are reported.

“Just because we made it through big tech doesn’t mean earnings season is behind us,” said Danielle Shay, Vice President of Options at Simpler Trading. “That big move is likely coming this week into next week.”

Fed actions last week vs. Fed speeches this week and a new round of earnings reports will change things up for traders.

“Most of the tickers on the docket this week are volatile in a different way than they were last week,” Danielle said. “While last week, we were faced with market-moving mega-cap stocks, this week we have all kinds of former IPO (initial public offering) darlings reporting that have already gotten crushed.”

She pointed out stocks within the transportation and software sectors, among others.

“These stocks have significantly less volume but are highly traded by retail traders and often experience large percentage moves,” Danielle said. “For these reasons, they can make for suitable trading if you aren’t afraid of risk-taking and volatility.”

Danielle only focuses on stocks in this arena that have high short interest and are near recent highs.

“It’s certainly not because they are good companies,” Danielle said. “I doubt any of these reclaim their former glory days. But I’m always on the lookout for potential trading setups.”

Simpler’s traders continue to build a roadmap for working through the ongoing market volatility.