Press "Enter" to skip to content

Risk-Off Mode: “Higher for Longer” Rates to Moderate Growth, Opportunity for Disciplined Investors

Risk-off as Inflation spikes again.

After yesterday’s sell-off due to the spike in inflation, the market is back in a risk-off mode.   Investors will be looking for a bounce today, but the underlying trend is a pause and a broadening out of the market rally.  The belief that the Fed will be cutting interest rates anytime soon diminished dramatically.  Treasuries jumped, mortgage rates moved higher, and stocks tanked.  The market is reacting quickly with even some analysts predicting another rate hike.   The market is starting to price in the concept of “Higher for longer” as the Fed has been saying for the last several months. 

“Higher for longer” means that the lagging effect of higher rates are going to continue to moderate the economy.   The economy will continue to slow as consumers will be hit with higher rates on maxed out credit cards, more expensive housing, and a slowing of the job market.   This should have been expected as consumers spent savings from the pandemic and started using credit cards to maintain the consumer confidence

The economy is still amazingly strong and the best out of all developed countries.  However, there will be a slowdown.   Investors should continue to focus on quality growth companies that offer superior earnings, innovation, and product disrupters.  The focus should be on earnings growth in this period of risk off, realizing that companies that are growing revenue now will be primed to excel more as interest rates do eventually fall. 

On the earnings side, Lyft (LYFT) moved higher after it posted better-than-expected earnings in the fourth quarter. Airbnb (ABNB) slipped more than 5% as it expects revenue to moderate in the future.  There should be some caution as the consumer is being tapped out with higher interest rates and maxed out credit cards.  Higher rates will lead to moderation of the economy, but it is a lagging effect.  It could take months to see some of the slow down.  Additionally, Kraft Heinz (KHC) is declining because of missed revenue and profit.  Robinhood (HOOD) is higher with a reported surprise profit benefiting from the market optimism over the last few months.  Today after the close, we will get results from Cisco (CSCO) and Occidental Petroleum (OXY).  

Although the market has had a sell-off, we are focused on the long-term.  This is the opportunity for investors to be disciplined and patient.  Quality growth stocks should benefit as the market takes a pause and the stock market begins to broaden out and rewards stocks that are fundamental strong.  Investors will begin to focus on stocks that haven’t participated in the recent run. 

Key Points: 

  • The stock market was in a “risk-off” mode, with yields on Treasury notes rising and equities down because of January’s Consumer Price Index (CPI) report, above the Federal Reserve’s target.
  • The US economy is expected to continue growing at a moderate pace but slowing compared to recent years. Trade and government spending may act as drags on growth.
  • While inflation is lower than 2022 peaks, it remains a problem leading to “higher for longer” and a probability of additional interest rate hikes.
  • Earnings continue to be strong, and the economy is still very resilient.   The economy will moderate but it is an opportunity to take advantage of the best companies with good earnings growth. 

Be First to Comment

Leave a Reply

Your email address will not be published. Required fields are marked *