CAPITAL IDEAS: Has the stock market priced in the Fed’s expected rate hikes?


On June 15, 2022, the Federal Reserve’s Open Market Committee (FOMC) raised the federal funds rate to 1.65%. They pledged to “undertake open market operations if necessary to keep the federal funds rate within a target range of 1.5-1.75%.” Let’s call it 1.75% for today’s discussion, which is in line with the usual commentary.

According to data from Bloomberg, the bond market expects short-term interest rates to reach 3.6%.

Let’s see how the Fed could push short-term interest rates up to 3.6%.

  • As of June 15, 2022, the federal funds rate is 1.75%. At subsequent FOMC meetings,
  • On July 27, 2022, rates could increase by 0.75% to 2.50%.
  • On September 21, 2022, rates could increase by 0.50%, to 3.00%.
  • On November 2, 2022, rates could increase by 0.25% to 3.25%.
  • On December 14, 2022, rates could increase by 0.25% to 3.50%.
  • On January 27, 2023, rates could increase by 0.25% to 3.75%.
  • On March 17, 2023, the Fed may suspend rate hikes.

The calculations match bond market expectations. It is safe to say that the stock market has also priced in some of the expected rate hikes. It remains to be determined whether the actions have incorporated the associated economic damage. I don’t believe they did.

Currently, Standard & Poor’s expects operating profit for the twelve months from the second quarter of 2022 through the second quarter of 2023 to be $233.71 for S&P 500 companies. S&P 500 briefly cut the price-to-earnings (P/E) ratio to 15.5.

Since 2015, the index has spent almost no time below 15 times expected earnings and has only briefly approached 14 near the 2018 and 2020 lows. The index would need to drop to around 3,272 points to get the S&P 500 a 14 P/E with earnings currently expected. That would be down about 32% from its January 2022 peak.

Forward earnings change often. Assume that actual earnings end up being 5% lower than estimates. In this case, the S&P 500 had reached a forward price/earnings ratio of 16.4, down from 15.5, and a bigger decline should occur to reach a 14 P/E. Keep in mind that it is not necessary to reach a 14 P/E, no matter what the “E” ends up being.

Hitting a P/E of 14 on the S&P 500 would be close to its 200-week moving average, which was 3,477 as of June 15, 2022. The 200-day moving average is a long-term level that some technical analysts target as a significant background. It’s still not good news, but I’m here to inform you, not to comfort you.

What am I thinking of doing now?

First, let’s recognize that asking how to position your investments defensively after a roughly 25% drop in the stock market might be a little late. But there are still options if you want to add some insurance to your wallet.

It is not unreasonable to expect more from a stock market decline. However, it is probably unreasonable to think that this is not a good buying opportunity. Don’t let the search for the lowest price keep you from getting a reasonable price. I’m a net buyer at these levels because no one can consistently time the bottom.

I’ve said it before, and I’ll say it again: smart people can look stupid when they say something positive in the midst of chaos. Pessimists seem brighter because the problems are visible. In contrast, optimism gives credence to things that didn’t happen. I may seem disconnected from being constructive about the long-term nature of the stock market.

When things were going well in 2021, I also looked disconnected. I said a bubble was forming in the stock market. In my January 25, 2021 column, I wrote, “The plan is to slowly shift to less ‘bubbly’ areas over time and, if necessary, react more quickly if we need to.

As readers will recall, I went from growth to value in April 2021, more in January 2022, and then again for the past two weeks. More recently, these moves might have seemed sane. But in 2021 and even in January 2022, I’m pretty confident that people thought I was stupid to go against the optimistic crowd.

I don’t remind readers to brag. I’ve been wrong a lot over the past few years. I didn’t think COVID-19 would shut down the world. I should have bought a ton of Bitcoin; I bought Treasury inflation-protected and emerging market securities to play on inflation when I should have bought commodities. A braggart wouldn’t remind you of those big duds. I share my realization that people generally don’t want to hear about party shit when things are going well. And now that the world feels like it’s falling apart, my advice for finding great buys, even if they’re not at the lowest prices, isn’t what most readers want to read.

Some investors want me to say everything is basically horrible and they should get out now. Why? Because selling would make the pain go away, but they know it’s an irrational decision. They want me to rationalize an emotional decision. I don’t blame these people. I understand and I will give you a solution.

One of the things I plan to do is add more buffer ETFs to my portfolios. The beauty of these tools is that you can manage some of your downside while still being exposed to equity-like returns, albeit capped. I have used many Innovator Funds tools in the past and told readers about them. I’ll let readers know when I do it again. If you prefer to act before me, either to expose yourself on the upside or to protect yourself on the downside, I suggest two things. First, do it through your current financial advisor (not me; your advisor knows your situation better than I do). Second, make sure your financial advisor spends at least a few days taking diligent notes from the company’s training center.

Technical deposit

Author’s note: In the spirit of showing my work, the following four paragraphs are for nerds. If you don’t want to lose your mind, save yourself a headache and skip to the last paragraph.

I am not constructive on the market throughout the next few months. Still, things have gotten so bad that’s probably encouraging for the longer-term market. For example, the stocks that make up the S&P 500 index are relatively oversold. As of June 17, 2022, only 2% of stocks were trading above their respective 50-day moving averages. Major lows were made on March 23, 2020 and December 24, 2018, when this figure reached 1.2%.

This could be a setup for a big rally, but it’s still not enough to match the “funds” levels of 2020 and 2018. As of June 17, 2022, 13% of S&P 500 stocks were below their 200- daily moving averages. On March 23, 2020 and December 24, 2018, these figures reached 3% and 8% respectively. I suspect we need lower stock prices before the final low is reached, as opposed to a marketable low. The good news is that the 13% figure has been a reading below five percentiles since 1994. It’s a rare reading, but when it’s happened before, the median 12-month return for the S&P 500 was 26.2. %.

On June 14, 2022, the S&P 500 10-day advance-dip (A/D) reached a negative magnitude typical of market lows, according to Bespoke. The A/D line subtracts daily falling stocks from rising stocks and adds them up for the rolling 10-day period. When the number is negative, there are more stocks going down than up. It hit minus 1,907, which is in the bottom percentile of readings since 1990 and compares to minus 1,879 for all declines above 10%. The stock market posted average gains of 13.1% and 21.5%, respectively, after similar negative A/D declines.

It’s important to remember that I believe the US economy is currently in a recession (as opposed to all the chatter about “will there be a recession?”). For this reason, the official entry of the S&P 500 into a bear market has disastrous consequences. Despite reasonable valuations, stock prices can fall. I grew up watching the VIX, or the “fear gauge,” to signal the bottom of a decline. A VIX of 50 tends to be the closest thing to a bell ringing at the bottom, as I’ve seen. Unfortunately, the VIX is a significant distance away from 50, which means there could be more sales. However, the stock buy/sell ratio tends to signal a bottom. As of June 21, 2022, the put/call ratio was 0.84. Significant lows were set at 1.00, 1.13, and 1.14 in 2020, 2018, and 2016, respectively. We seem to be close to a bottom, but not there yet.

I suspect the next few months will be even more painful for investors. I don’t trust anyone’s judgment, including my own, in determining the timing or magnitude of a final bottom. However, I have a greater belief in my non-commercial skills being used to perform longer-term assessments. I think stocks will have done well by this time next year. Therefore, as was the case a year and a half ago, “the plan is to slowly shift to less ‘bubbly’ areas over time and, if necessary, react more quickly if necessary.”

Allen Harris is the owner of Berkshire Money Management in Dalton, MA, managing over $700 million in investments. Unless specifically identified as original research or data collection, some or all of the data cited is attributable to third-party sources. Unless otherwise stated, any mention of specific securities or investments is for illustrative purposes only. The adviser’s clients may or may not hold the securities in question in their portfolios. The Advisor makes no representation that any of the securities discussed have been or will be profitable. Full Disclosures. Direct inquiries to Allen at


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