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The fed raised the benchmark interest rate 25 bps again to 4.75%-5%. They hinted that they are very close to pausing hikes for the year but don’t expect to cut unless either inflation comes down quickly or unemployment skyrockets – none of which seems likely in the near term. The market thinks that the Fed is bluffing and it is currently projecting rate cuts starting in June because of recession risk. The market has been wrong a lot when it comes to anticipating Fed’s decisions in the past year or so.
The S&P 500 is up almost 4% year-to-date. The index is market-cap weighted, meaning mega companies like Apple and Microsoft have a much bigger impact on it. The equal-weighted S&P 500 is actually down 2% for the year. The Nasdaq 100, which is also market-cap weighted, is up 17% YTD. A few big tech companies account for all market gains so far this year. The rest of the market has been under pressure. The rule of thumb is that such a concentration of strength is not sustainable. We have seen similar play in the recent past and we know that it can continue a lot longer than most expect.
Semiconductors have been especially strong. SMH is up 26% so far in 2023. If the market is really worried about a recession, semis should not be outperforming by such a wide margin. Maybe the pullbacks in energy, basic materials, industrials, and financials are not about a potential recession but about the unwinding of the so-called inflation trade from the last year when anything tech was clobbered and money went to other sectors.
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