How to Invest After the Fed Rate Hike

By TradeSmith Research Team

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Pausing interest rate hikes would have sent a message that the Federal Reserve didn’t think the economy could handle it while raising interest rates could put even more pressure on the cracks starting to form.

That’s the no-win situation the Fed found itself in yesterday. And ultimately, it landed on raising interest rates by a quarter percentage point as the lesser of two evils.

The markets seemed to appreciate that the Fed did what everyone was expecting, with the S&P 500, Dow Jones Industrial Average, and Nasdaq all up slightly immediately following the 2 p.m. announcement. However, those were all down by the closing bell.

Of course, just hearing the news isn’t going to help you with your investing.

That’s why we rounded up several of TradeSmith’s investing and trading experts to not only get their initial reactions to the news but to also share how to make sense of everything and what to do next.

Let’s start with our friends at LikeFolio.

Megan Brantley, VP of Research
Andy Swan, LikeFolio Co-Founder
Landon Swan, LikeFolio Co-Founder

Quick Take: As our team shared on Monday, we expected this to happen. The Fed wanted to show that it wouldn’t be pushed around, and not hiking rates could have actually led to a large sell-off.

It would have shown a lack of confidence that the economy wouldn’t be able to handle a rate hike. Moving forward, we expect hikes to ease unless there is a resurgence in inflation.

How to Invest: Our team has been watching Coinbase Global Inc. (COIN) and Bitcoin (BTC) closely since the end of 2022, and the banking issues are starting to highlight Bitcoin as a store of value. Our data shows that “Decentralized Finance” mentions have surged in Spring 2023:

And if Bitcoin does well, Coinbase does well.

Mike Burnick,
TradeSmith Senior Analyst

Quick Take: It’s no secret that I’m not the biggest fan of the Fed, as it’s mostly filled with economists and academics who have zero real-world experience in running a business or investing money for clients.

And as I told the members of Parabolic Profits earlier this week (access requires being logged in), the bind the Fed found itself in yesterday is a direct result of one of the most aggressive interest-rate campaigns in memory. The interest rate hike was in line with expectations, and if there’s a breather on hiking interest rates going forward, this can give banks time to rehab their bruised balance sheets. In the short term, expect tighter credit conditions for banks.

How to Invest: My focus hasn’t changed on zeroing in on high-quality companies that pass on their revenue to loyal shareholders through dividend payouts. FactSet recently shared that “dividends” was its most popular search term in the fourth quarter of 2022, with “inflation” close behind in third:

That doesn’t surprise me: Inflation is still high even if it’s cooling and folks want to generate income in the here and now to offset higher prices — not watch their savings dwindle away. Here are two such stocks I recently covered.

John Jagerson and Wade Hansen,
Constant Cash Flow Analysts

Quick Take: The Federal Open Market Committee (FOMC) is always trying to thread the needle between raising rates too high and leaving rates too low. They don’t want to let inflation get out of control, but they also don’t want to stifle economic growth too dramatically.

At this meeting, they had another concern they had to deal with… public confidence in the U.S. financial system. The Fed could have helped stabilize banks by leaving rates unchanged, but that could have spooked investors by sending the message that it thinks the problems banks are facing are more important than inflation. We expected the FOMC to split the difference and raise rates by 0.25%, and that’s what we got yesterday.

How to Invest: In Constant Cash Flow, we can pinpoint 365 high-probability profit opportunities every year. And in our featured series Three-Thought Thursday (going out later today), we cover any interesting trends popping up in the market. So, you can bet we’ll be all over the Fed news. If you’re new to Constant Cash Flow, you can access our Quick Start Guide by clicking on the image below:

Jason Bodner,
Quantum Edge Pro Editor

Quick Take: The Fed threw everything it could at the financial crisis in 2008 and the COVID crisis in 2020 to save the banking system and the economy. It is not going to let all that work over the last 15 years go to hell and let everything break.

Before yesterday’s announcement, I told Quantum Edge Pro members (access requires being logged in) that we are getting much closer to the end of rate hikes than the beginning. We saw a less aggressive Fed with a small rate hike yesterday, and that will be good for the economy and for stocks.

How to Invest: Good stocks can still rise in choppy markets, and we will continue to use any weakness to pick up strong stocks at cheaper prices. I find it very interesting — and encouraging — that the “strength-and-safety trade” continues to be Technology and Discretionary stocks. Tech and discretionary shares have been among the leaders all year, and they are typically strong in growth markets. While not an official recommendation, one tech stock that flashed Big Money buy signals in my system is Fiserv Inc. (FISV), a payment processor with 1.4 billion global accounts. My smart tech system has detected five Big Money buy signals already in 2023, and it’s worth noting that there have been no Big Money sell signals since last summer. FISV has the makings of an opportunity if you’re searching for potential diamonds in the rough in the beaten-down finance sector.

You can learn more about FISV here.

While there’s still a lot to digest about what’s ahead, tapping into the insight of our experts shows that there is always a way to profit if you know where to look.