Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
The Fed’s meeting next week could have a dramatic effect on both the markets and the economy at large.
It has no choice but to raise rates. After all, inflation has gotten out of control.
Today, I want to run through some of the major factors that will influence the Fed’s decision next week. We’ll also go over how that will impact the markets.
First, let’s start with oil…
Oil and Inflation
After hitting a 13-year high this past week, the price of oil dropped by more than 10% on Wednesday.
That added a much-needed boost to the markets.
For example, the S&P 500 gained over 2.5% on Wednesday, and Germany’s DAX Index finished up nearly 8% for the day.
However, it’s possible this was just a blow-off in the oil price before it runs to a fresh high. Only time will tell.
News of high-level meetings between Ukraine and Russian officials – along with talks of OPEC ramping up supply – was likely behind the drop.
We can expect to see even more violent swings in oil prices as it remains in the news over the coming weeks.
But even if oil drops by another $10 or even $20 a barrel, it won’t be enough to take the heat out of inflation.
Commodities will continue to soar.
And that means the Fed will have to raise rates quickly.
Now let’s move on to the next factor that’s impacting the markets…
Jobs Post Strong Growth
Just when I thought the job markets peaked for this cycle, last month’s data proved that the economy continues to grow.
When we looked at the unemployment data last month, we saw how the unemployment rate rose 0.1% (to 4.0%) – only its second increase since April 2020.
With interest rate rises on the way, the economy looked as close to full employment as it was going to get.
However, the latest data shows unemployment at 3.8%… That’s 0.1% below market forecasts and the lowest level since the pandemic. Now it’s getting much closer to its pre-pandemic level of just 3.5%.
Before the pandemic, there were around 5.7 million people out of work. Today, that number is just under 6.3 million. While that’s still a gap, it’s smaller than the data from six months ago. Back then, the number of unemployed was 8.4 million – over two million higher than today.
You can see the surge in non-farm payrolls in the graph below that drove the unemployment rate down…
United States Non-Farm Payrolls
Source: Trading Economics, U.S. Bureau of Labor Statistics
With the U.S. economy adding 678,000 jobs – a massive 70% above expectations (of 400,000) – the latest data stopped the downtrend that began in October 2021.
February’s figures were the highest since July 2021. And the biggest area of growth was the leisure and hospitality sectors, with 179,000 new jobs. 151,000 of those were added in January alone.
Hopefully, that’s enough proof that the peak of the pandemic is now behind us.
Add all these factors together, and it shows an economy that’s much more resilient than the market is showing… even with an unfolding war in Ukraine.
That means two things:
First, the Fed will raise rates when it meets next week.
Even if they go with just a 0.25% raise (and not 0.5% as I think they should), you can bet there will be a 0.5% jump at some point.
Whatever the Fed decides, it will finally take some of the speculation out of the market. And that might actually offer some much-needed certainty.
And second, the market has priced in just about every bit of bad news it can. But don’t forget it always looks to the future.
With even the slightest hint that a cease-fire or peace treaty might happen, the market could rebound like an unloaded spring.
Editor, Trading With Larry Benedict
What are your predictions on the state of the economy?
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