The Federal Reserve released the minutes of their recent meeting and they indicated that they would likely need to continue to raise interest rates to combat “sticky inflation” in the economy. There was no indication that a pause was likely anytime soon, in fact some members were in favor of a 50bp increase instead of the recent 25bp increase.

They wrote: “A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount. The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way.”

The Labor Department reported a 6.4% annual inflation increase in CPI for January, down from a 6.5% annual inflation increase in December. The number came in above economist estimates of 6.2% annual inflation. However, the January month-over-month number was actually 0.1% higher than the December number.

“With inflation still well above the Committee’s longer-run goal of 2 percent, participants agreed that inflation was unacceptably high. A number of participants commented that the costs of elevated inflation are particularly high for lower-income households. Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path,” the minutes said.

The strong wording likely came about due to the hotter-than-expected CPI print last week. The Fed’s next decision on rates is due on March 22. The bond market is still projecting another 0.25% hike in March, although on Wall Street, some expect the Fed to opt for a more aggressive 0.5% increase.

They wrote: “Participants agreed that the risks to the outlook for economic activity were weighted to the downside,” the January Fed minutes said. This sour look at the economy along with the strong wording on potential rate increases will continue to weigh heavily on the stock market.

Below, you can see a graph of the S&P 500 index from mid-December 2021 (right before the market topped out and began to grind down). I’ve added a red Trend Line so you can see what was a strong resistance to prices moving higher.

You can see that the strong rally during January broke through the resistance and the trend line became support. Even though the index topped out in early February, it is very common for markets to pullback to the trend line, testing the support before moving higher (remember we have discussed that wne a trendline that is resistance is broken, it then becomes support).

For 2023 to to be a real turn-around in the market, the S&P 500 needs to remain above 3980 – you can see at the time I screen capped the graph above it was at 3985 but it is at 3978 as I am writing.. If we close below 3980 and stay there, we could be looking at next testing lower support levels at 3900, 3800, and 3575 – if those do not hold, then we potentially could retest the pre-covid crash high of 3380.

However, we have a long way to go before we need to worry about those lower support levels as 3980 is a very strong trendline with multiple price points to support it, so no need to panic. However we need to be aware of what is possible to manage risk appropriately. There is every chance that we will see a successful test of the trend line support and the market move higher to Summer 2022 rally high in mid-August near 4350.

So what is your plan if you are managing your own money? Keep watch of 3980 and as long as the market is above that level (it is already back to 3986 from 3978 in the few minutes its taken to write these few lines), you should keep a target in mind of 4350 in your sights. Based upon the negative comments coming from the Fed and a longer than anticipated period of tight monetary policy, the S&P 500 Index could grind in a range between 3980 and 4350 for a period of time until the Fed indicates inflation is under control. If investors believe that period of time will be significant and 3980 does not hold, then we may be in for a new leg down that erases all of the 2023 gains so far and maybe more.

Thanks for reading the blog – if you ever need help in navigating the markets, we would love to help you. Just email us through the contact link on the website and we can start a conversation.

–Mark