Enhancing Investment Outcomes with Tactical ETF Trend Indicators
The Federal Reserve has continued to raise interest rates since February 1, 2023, but the Treasury market disagrees with the Fed’s hawkish stance. The terminal fed funds rate is expected to be 5.125%, in line with the Fed’s forecast at its December meeting. Despite the Fed’s rate hikes, the market remains neutral and is searching for direction. The tactical rules of “Don’t Fight the Fed”, “Don’t Fight the Trend”, and “Beware of the Crowd at Extremes” are trending towards a more neutral portfolio positioning as the demons of 2022 remain.
By Kevin Nicholson, CFA, Global Fixed Income CIO, Co-Head of Investment Committee
‘Don’t Fight the Fed’: Fed hawkish…but Treasury market disagrees.
‘Don’t Fight the Trend’: Improving with the hopes of a softer landing.
‘Beware of the Crowd at Extremes’: Neutral and searching for direction.
The calendar has flipped to a new year, but our Three Tactical Rules are still fighting the demons of 2022: a Federal Reserve determined to fight inflation, a trend that continues to fall, and a crowd that hangs out near extremes. While the demons remain, progress has been made and the tactical rules of “Don’t Fight the Fed”, “Don’t Fight the Trend”, and “Beware of the Crowd at Extremes” are trending towards a more neutral portfolio positioning in our view.
‘Don’t Fight the Fed’: Red Light – Fed hawkish, but Treasury Market Disagrees.
The Fed raised interest rates at the eighth consecutive meeting on February 1, 2023, moving the target fed funds range to between 4.50% and 4.75% (see blue line in chart below). Market expectations are for the Fed to end its interest rate hiking campaign after the May meeting, as recent economic data has indicated that the economy is slowing with one exception: a strong labor market. If market expectations prove correct, the terminal fed funds rate will be 5.125%, in line with the Fed’s forecast at its December meeting. Despite the Fed having raised rates nearly five percentage points since…