Why Traders Should Be Excited For Next Year…
The Federal Reserve just wrapped up a meeting this week. Normally, that would give the market some cause for concern. Fed meetings always hold the possibility of a surprise.
But traders haven’t been overly concerned with the Fed right now. The chart below shows traders expected the Fed to put interest rate policy on hold until at least next September.
Source: CME Group
This chart shows what traders expect the fed funds rate to be at the end of the Fed’s meeting. Fed funds is a short-term interest rate the Fed sets, and it serves as a benchmark for many other rates in the market.
Right now, the fed funds rate is set to a range of 0% to 0.25%. Based on futures trading, the market was pricing a 100% probability the Fed will keep the rate there for the next five meetings. And that’s exactly what just happened. There is less than a 6% probability of an increase next September.
The Fed raises rates to slow the economy down, so the prediction that the Fed will leave rates unchanged for the next 10 months is consistent with slow growth in the economy.
My Outlook For Next Year
I certainly agree with this assessment. It seems unlikely the economy will turn for some time. However, I expect the recovery to be K-shaped, and that means there will be significant trading opportunities in the next year.
A K-shaped recovery is one where different parts of the economy recover at different rates.
Parts of the economy will be propelled by more than $11 trillion sitting in savings accounts.
Source: Federal Reserve
Savings had been rising since the last recession. It is likely many consumers will hold more in savings after seeing how suddenly the economy can change for the worse. But it’s also likely there are hundreds of millions of dollars that will be spent as the money as the economy reopens.
That’s the top part of the K-shaped recovery. The lower half will include millions of individuals who could benefit from the additional fiscal stimulus that is being debated in Congress.
Fed Chairman Jerome Powell has repeatedly cited the need for fiscal stimulus. This indicates the Fed understands that there is little more they can do without Congress and there are concerns that Congress can’t do enough.
A K-shaped recovery indicates there will be opportunities in discretionary spending, while consumer staples may deliver average returns. That’s a trend I’ll be watching in 2021. A short-term trend is likely to be based on the fact that some amount of fiscal stimulus seems inevitable.
Congress continues to argue over the details, but there seems to be agreement that some money is needed. A new administration is likely to seek a deal that includes money for infrastructure, programs that will be comfortable to President Biden since he oversaw infrastructure spending as Vice President.
How I’m Trading Right Now
That points toward possible gains in stocks like Caterpillar Inc. (NYSE: CAT). The company is an ideal infrastructure trade because its heavy equipment is used in a variety of projects.
In addition to being a news-driven trade, CAT is timely on a technical basis.
The stock has been moving steadily higher for months. Rallies have been followed by pullbacks, and each new high has been at the level projected by previous pullback.
The most recent pullback provides a price target near $188. There is also support near $150, the low of the most recent pullback.
Income Trader Volatility (ITV) is also bullish, adding to my expectation of higher prices in the near term.
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