Fed Expectations vs. Wall Street Predictions | Why They Don’t Always Align
In my last article, we went over what the Fed is and what cutting/raising rates does to the stock market. I highly recommend reading that article before we dive into this one. We’ve learned about how/why the Fed adjusts rates (in a sentence: the long term success in the American economy), and analyzed how this can be predicted by: trends in inflation, buying habits, etc. This is fairly easy to do as American consumers. However, how does Wall Street form their predictions?
Forming Great Expectations
Similar to the economists in the Fed, Wall Street analyzes real-time data, market futures, and the economic indicators given by the Fed in order to predict the Fed’s next move. However, Wall Street isn’t a disciplined market reactor, it’s more like a moody teenager. Reacting quickly and aggressively to even the faintest rumor of signaled change. All of the previously stated things Wall Street uses to form predictions are inevitably trumped by any piece of news. If we look at earlier this year during the tariff debacle, some of the highest swing days moved simply on the rumor of the removal/addition of tariffs rather than the actual implementation of the tariffs.
The Collision of Expectations
The Fed is focused on long-term goals, communicating upcoming changes, and maintaining conservative changes in rates. Meanwhile, the moody teenager “Wall Street” reacts quickly, aggressively, to even the slightest rumors. Logically, this deducts why both often don’t align, even if it may appear they are consuming the same information. Learning the behavior of Mr. Market after the Fed’s decision is beneficial to all investors. So I encourage you, look at the S&P500’s reaction in past rate cuts/raises; by comparing: what the general consensus of Wall Street analysts were expecting vs what the actual rate change was, and how the following trading day was effected.
Positioning Your Portfolio
All Fed decisions are deemed irrelevant by the time it takes the market to move on. Therefore, the simplest way to beat the expectations game is by diversifying, avoiding stocks that fall victim to short-term volatility, and avoiding reacting impulsively. All of this information is vital to keep an eye on as an independent investor, but should never be the cornerstone of a portfolio. That being said, I’ve found a way to profit off of the volatility the market brings during decision time for the Federal Reserve. If you’re interested in learning it, click below.