Friday, July 3rd, 2020

Slow and Steady Fed Rate Hikes


The financial markets have been waiting to see just how soon and how fast the US Federal Reserve will raise interest rates now that the recession is well on the wane. It appears that slow and steady Fed rate hikes are likely. CNN Money notes that Wall Street is happy with the most recent Fed statement. Markets rallied. Why was that?

The Fed didn’t do anything unexpected. The market hates surprises. The central bank reassured the market that a rate increase was “unlikely” at its next meeting in April. That is not a surprise either. Wall Street has been betting on rates starting to go up in June or later.

The Fed also issued new forecasts. It lowered its 2015 and 2016 outlook for gross domestic product (GDP) slightly. It also cut its inflation forecasts and predicted that the unemployment rate will fall further than it thought a few months ago.

According to the Fed’s so-called dot plot – which shows where each Fed member thinks rates should be – the median estimate for interest rates is 0.625% at the end of 2015. In December, the median was 1.125% All this suggests the Fed will take a slow and steady approach to rate hikes. That should calm down investors who had been worrying the Fed would boost rates too quickly.

How does this news affect options trading? When it was expected that the Fed would quickly and aggressively raise interest rates stocks fell. Now that we are looking at slow and steady Fed rate hikes which stocks will prosper and which will suffer?

Calls on Which Stocks?

USA Today writes about 8 big bounceback stocks that they predict will go higher. For this options trader this means buying calls.

It’s time to buy stocks again – at least that’s what investors took from the Federal Reserve’s move this week. Even stocks that were battered last year are joining in the rally.

There are eight stocks in the Standard & Poor’s 500, including solar equipment maker First Solar (FSLR), video-game seller GameStop (GME) and online retailer (AMZN), that are staging impressive bouncebacks this year – and analysts see even more upside, according to a USA TODAY analysis of data from S&P Capital IQ. These are stocks that fell 10% or more in 2014 – but are up 5% or more this year.

Others in the list are General Motors, News Corp, CBS, ADT and Pioneer National Res. The threat of business-killing high rates seems less likely so many companies appear set for gains in the coming year. Buying calls on the likes of Amazon, GameStop and First Solar may well be a good idea.

Not Just the Fed and Interest Rates

Slow and steady Fed rate hikes have a calming effect on the market but interest rates are not the sum total of things that affect stocks and investing. The economic doldrums that affect Asia and Europe continue and the price of crude oil is still going down. ABC News reports the story.

The Standard & Poor’s 500 fell 12 points, or 0.6 percent, to 2,088. The Nasdaq composite rose seven points, or 0.1 percent, to 4,989.

CRUDE: Benchmark U.S. oil sank $1.11 to $45.54 a barrel in New York trading, extending a slump that has slashed prices by more than half over the past year. Brent crude, a benchmark for international oils used by many U.S. refineries, fell $1.21 to $54.70 a barrel in London. Oil and gas companies led eight of 10 industries in the S&P 500 index lower.

HOW LOW? “Given the big drop that we’ve had the big question is, when does oil hit bottom?” said Jeff Carbone, a senior partner at Cornerstone Financial Partners in Charlotte, North Carolina. “I don’t think oil will bottom out until a company or a country flinches and cuts production. Right now producers are still pumping as much as they can.”

It appears that so long as producers keep pumping and Asia and Europe flirt with recession stocks are not going to take off and fly. As always do your own homework when trading options and never be afraid to stay out of a trade that you do not understand.

More Resources

    Related Educational Products:

    Comments are closed.