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The Fed has been talking about it for more than a year.
Wall Street's analysts have caught on in the last few months, finally.
Even the Fed's staunchest critics are starting to agree.
I'm talking about interest rates. More specifically, the likelihood that rates are going to stay high for a longer period. Like into the second half of 2024.
In the last week, we've heard from multiple analysts that high-interest rates aren't going away for a while now.
And there's one sector of the market that's getting squeezed hard as a result. We'll get to that in a minute, first the Fed.
Next week, the Fed (Federal Open Market Committee) will meet to decide whether to raise interest rates or not. Note that there is no option to lower them, just raise or no raise.
A look at the current Fed Funds Futures indicates that the market is expecting the Fed to hold rates steady next week.
The problem really isn't rates going higher at this point, it's how long they are going to stay there.
According to the same Fed Funds Futures tool, the market is now forecasting that rates won't drop until June of 2024. A scant month ago the same "market" thought that we would see rates start to lower in March.
Hell, I can remember three or four months ago when the market expected to see rates start to fall before the end of 2023.
No way!
Why?
Because we're getting what everyone wanted, a soft landing.
Months ago, I pointed out right here that the market really didn't want lower rates by the end of the year.
The reason is simple. If the Fed were to lower rates by December it would mean that the economy was going to hell in a bucket. You don't get lower rates for free, there must be some pain involved at this point.
But the current path to a potential soft landing means that the Fed can relax and let these higher rates sink in.
This is a problem for a few sectors. I know... the first one you're thinking of right now is the housing sector, and you're not wrong.
Inventory is now starting to catch up with demand which means that higher rates will slow the housing market. That's a problem in the future.
But right now, as we're gearing up for the next earning season - it's only a month away now - the financials are the sector that is speaking to you. More specifically, the regional banks.
The regional banks are the same group of stocks that set fire to the market in February. The reason? The effect of higher rates on their balance sheets.
It was an outlier event to see multiple banks shutter, but to this day the core problem hasn't gone away.
Higher interest rates.
Higher interest rates are putting more pressure on the regional banks from both sides of the balance sheet.
Higher rates have done what they intended, slow loan activity. …
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.