Is the Fed almost done?
The biggest question for determining market direction for the rest of the year is: when will the Fed be done raising? Related questions are: When will the market decide the Fed is done, and will we have a hard or soft landing next year? And when will rising interest rates show up in lower profits?
On the day the Fed raised by 1/2%, I went to 70% cash. I've been trickling money back in (bought some MSFT LEAPs today), but still have 25% cash. I'm considering being fully invested with no shorts/puts (for the first time all year) by the next Fed meeting. My reasoning is:
1. much (not all) of the buy-growth-at-any-price euphoria has abated. Investors are now, for the first time in a very long time, talking about P/E and P/S ratios (rather than just momentum indicators) in stocks like MSFT and INTC. Not yet in QCOM and NTAP, though, so some air still needs to come out of the market.
2. In the last couple of weeks, there has been some encouraging info that the economy is finally responding to interest rate increases. Slowing housing, tightening credit standards, especially. So, maybe the Fed will do one more 1/2% raise, and then be done going into the election.
3. lots more stocks available at prices that a value (or growth-at-a-reasonable-price) investor can justify. Valuations, especially in the growth stocks, have come down a lot. The forward PE of the S&P 500 (22) is now only 10% higher than expected earnings growth rate. I think those profit projections are too rosy, but I've been thinking that (and been wrong) for two years now. Anyway, the "wealth effect" that worries Greenspan has been painfully decreased this year. |
