Search by author, topic or keyword
SpanishEnglishInvestments+2 topics

Following the Fed: What to Expect Next

The main focal point of 2022, so far, has been the efforts of the United States Federal Reserve to fight inflation through monetary policy. The decisions to raise rates year-to-date have been nearly unprecedented in magnitude, representing the fastest climb in the policy rate in the last 4 decades.




With the first six Federal Reserve meetings of the year behind us, many investors have turned their focus to the upcoming meeting on November 1-2. In preparation for this meeting, investors should recognize that markets operate as information processing machines, constantly incorporating information about future expectations into current prices. Furthermore, they should understand that the forces that move markets are unexpected news, not expected news, and that even events that are objectively bad for markets can result in positive returns to the extent that they were unexpected.

Here’s a useful example:

Suppose you were selling your house. You know that there are some old pipes in the basement that are likely rusted, and the air conditioning system likely also needs to be replaced. However, you are in a rush to sell your house, so you put it on the market at a price that reflects those expectations. A few months later you finally get a chance to go look around, and you notice that the pipes aren’t rusted as badly as you had thought; only 50% of the pipes need to be replaced and the A/C does not need to be replaced at all! How would you change the asking price for your house?

This is a useful example because it gets at the heart of the importance of information relative to expectations and forces you to think about how you would respond to new information. Objectively, having to replace pipes in your house is bad, as it will be expensive. But upon finding out only half of the pipes need to be replaced when your original expectation was all of them would need replacement is actually relatively good. Markets function in the same way.

While investors look at many economic measures to gauge the health of the economy, the primary focus of the Fed this year seems to be on inflation. There are several recent indicators suggesting that inflation may be moderating:

  • As reported by Redfin, median national asking rent declined in September indicating slowing rental price inflation
  • The price of gold, generally regarded as a leading indicator for inflation, has been steadily declining
  • Futures prices are estimating cheaper oil prices in the future; energy prices have been a large contributor to inflation year-to-date
  • The OECD Consumer Confidence Index, having fallen in six straight months to start the year, has held steady for three straight months
  • CAPE/Schiller Home Prices index seems to have peaked in June, suggesting a slowdown in housing price inflation

Many derivative markets exist specifically for investors to place bets on various financial instruments, using information in these indicators to predict future prices; for example, investors can trade futures contracts on the Fed funds rate. Prices of these derivatives react, nearly instantly, to new information. You can see this behavior in practice on October 13th, where the future rate hike expectation passed 75bps for the first time on the back of a worse-than-expected CPI data release.




As of 10/21, the market is expecting a 77 bps increase in the Fed funds rate coming out of the November meeting. This translates roughly to a 93% chance of a 75 bps increase and a roughly 7% chance of a 100 bps increase. Investors should recognize that these are the probabilities currently incorporated into securities prices. Using the same framework that we established previously, we believe a 75 bps increase in November would, with all else equal, likely be a small catalyst for stocks, while a surprise 100 bps increase would likely lead to further decreases in equity prices.

In the end, nobody besides the Fed knows what will come out of the November meeting. Well-constructed plans and portfolios should account for the impacts of market volatility and market downturns, so reach out to your financial advisor to ensure that your portfolio is still on track to help you achieve your goals. In the end, the best investment plan is one that the investor can stick with; if you find yourself uncomfortable with the market volatility we have experience thus far in 2022, engage with your advisor to determine whether or not there are necessary changes to make to align you with a strategy that you feel confident investing in long-term.

Glossary

The OECD Consumer Confidence Index measures future developments of households’ consumption and savings. Values above 100 are optimistic, and below 100 pessimistic.

The CAPE/Schiller Home Prices index is a measure of U.S. residential real estate prices.

This material is for informational purposes and is intended to be used for educational and illustrative purposes only. It is not designed to cover every aspect of the relevant markets and is not intended to be used as a general guide to investing or as a source of any specific investment recommendation. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. This material does not constitute investment advice, nor is it a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. In preparing this material we have relied upon data supplied to us by third parties. The information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by Altafid, PBC or its affiliates, as to its accuracy, completeness or correctness. Altafid, PBC or its affiliates do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Altafid, PBC or its affiliates have no obligations to update any such information.

 Austin, USA
13215 Bee Cave Pkwy, Ste. A240,
Austin, TX 78738
 Santiago, Chile
Rosario Norte 555, oficina 1604,
Las Condes

Members of:

This property and any marketing on the property are provided by Altafid and their affiliates.
Investment advisory services are provided by Innealta Capital, LLC, an investment adviser registered with the SEC. Please be aware that registration with the SEC does not in any way constitute an endorsement by the SEC of an investment adviser’s skill or expertise. Further, registration does not imply or guarantee that a registered adviser has achieved a certain level of skill, competency, sophistication, expertise or training in providing advisory services to its advisory clients.
Brokerage services for our advisory clients can be provided by Charles Schwab & Co., Inc. , Apex Clearing Corporation and Pershing LLC, each a SEC-registered broker-dealer and member of FINRA/SIPC. These broker-dealers are not affiliated with Altafid or its affiliates.
Please consider your objectives before investing. A diversified portfolio does not ensure a profit or protect against a loss. Past performance does not guarantee future results. Investment outcomes, simulations, and projections are forward-looking statements and hypothetical in nature. Neither this website nor any of its contents shall constitute an offer, solicitation, or advice to buy or sell securities in any jurisdictions where Innealta Capital, LLC is not registered. Any information provided prior to opening an advisory account is on the basis that it will not constitute investment advice and that we are not a fiduciary to any person by reason of providing such information.
Any descriptions involving investment process, portfolio construction or characteristics, investment strategies, research methodology or analysis, statistical analysis, goals, risk management are preliminary, provided for illustration purposes only, and are not complete and will not apply in all situations. The content herein may be changed at any time in our discretion . Performance targets or objectives should not be relied upon as an indication of actual or projected future performance.
Investment products and investments in securities are: NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF,OR GUARANTEED BY A BANK • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities including possible loss of the principal amount invested. Before investing, consider your investment objectives and our fees and expenses. Our internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide tax advice, nor financial planning with respect to every aspect of a client’s financial situation, and do not incorporate specific investments that clients hold elsewhere. Prospective and current clients should consult their own tax and legal advisers and financial planners. For more details, see links above to CRS (Part 3 of Form ADV) for natural person clients; Part 2A and 2B of Form ADV for all clients regarding important disclosures.
The IN logo is a registered trademark of LinkedIn Corporation and its affiliates.
©2023 All rights reserved. 1095-INN-06/23/2022