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The Fed fires the starting gun… one move or the first of many?… why this cycle isn’t 2004… how to position your portfolio regardless of what’s coming
As I write on Wednesday afternoon, the Federal Reserve has raised its benchmark rate by a quarter point, to a target range of 3.75% to 4% – its first rate hike since July 2023.
The move itself was no shock. Heading in, futures traders had priced the odds above 92%, and even Wall Street’s hike skeptics had come around. What mattered more was everything around the decision.
Starting with the vote itself, it was unanimous – and that’s noteworthy.
Just weeks ago, this committee looked badly split – at the July meeting, three members who wanted a hike were outvoted. Today, even July’s doves fell in line. When a divided Fed suddenly speaks with one voice, that unity is itself a signal. And today, that signal leans hawkish.
Turning to the dot plot, the Fed’s projections now point to at least one more hike this year, possibly two. That’s up from the lone hike its June forecast implied.
Only two officials think the Fed is already done; four see two more hikes coming. The committee raised its inflation forecast, too, and doesn’t expect prices back to its 2% target until sometime after 2028. Clearly, this is not a Fed that thinks it’s finished.
Finally, there was Fed Chair Kevin Warsh’s press conference – or what passes for a presser in the Warsh era.
Longtime Digest readers know that I would routinely feature quotes from Fed Chair Powell that were substantive, or market moving. We can forget that.
The new chair has turned the presser into a masterclass in saying nothing despite lots of words: no forward guidance, no hints about the next move, no meaningful answers to reporter questions – all by design. He called inflation “sticky” and the economy “solid,” then spent the better part of an hour gracefully declining the follow-ups. He didn’t even place his own dot on the dot plot.
That’s less a complaint than a heads-up. In Warsh’s Fed, what actually matters now is the hard economic data between meetings and the official statement itself.
The one concrete thing he conceded was a reporter’s point that no rate hike can reopen the shipping lanes keeping oil above $100.
Turning to the market’s reaction, stocks initially popped when the dots showed only one more hike likely, but then gave it back as the reality of a still-hiking Fed set in.
The Dow closed down about 630 points while the S&P and Nasdaq were off 0.45% and flat, respectively. The 10-year Treasury sits right at 5%, its highest spot since 2007.
Now, with this hike behind us, we can turn our attention to the next question that Wall Street will labor over – is this a one-and-done or the first step of a longer climb?
Let’s dig in.
One hike, or the first of many?
In one camp are the hawks, who argue a single hike does almost nothing against inflation this sticky. Former Cleveland Fed President Loretta Mester made the case in an interview on Monday:
A single hike won’t suffice. I would imagine you’d want to front-load that, starting this year into early next year, and then pause to see how the economy reacts.
You have to be forward-looking.
In the other camp are the doves, led by Fed Governor Christopher Waller, who has signaled he’d rather hold rates where they are and give the economy room to breathe.
So, which camp will win out?
We lean toward “likely more” – and the reason is sitting in the oil market.
As I write on Wednesday, Brent crude trades at $105 and West Texas Intermediate crude sits at nearly $102 thanks to shipping through the Strait of Hormuz that’s largely choked off. And here’s the bigger issue for the Fed: This surge above $100 is too recent to have appeared in the latest inflation data. The most recent CPI covers August, when oil wasn’t far from its summer low back in early July. September’s spike won’t show up until the October report.
Translation: the inflation numbers the Fed sees next are likely to run hotter, not cooler. And hotter data is exactly what keeps a hiking campaign alive.
The Fed’s own dots try to split the difference: one more hike this year, then a pause through 2027 and a single cut in 2028. Not an endless climb – more like one more step up, then a long plateau.
But I’d hold that map loosely. Those dots reflect the Fed’s forecast of how September’s oil spike feeds through – a spike that hasn’t yet shown up in a single inflation report.
The next one, in October, is the first read on it. If it runs hotter than the Fed is banking on, “one more then done” won’t hold up under pressure from the economic data. Four officials already see more hiking than the median. And the dot plot has a long history of missing badly.
Why this hike isn’t the one from the history books
In yesterday’s Digest, we showed you what history says happens after the Fed’s first hike: a short-term stumble, followed by a strong medium- and long-term recovery. The averages were reassuring. Stocks are higher a year later, again and again.
But averages hide an important reality: Not all rate hikes are the same.
There are two very different reasons that the Fed raises rates. The first is a strong economy. Think 2004: The Fed hiked into strength, stocks wobbled, then climbed. In this case, a rate hike is really a vote of confidence – the economy is strong enough to take it. This is the world behind most of yesterday’s cheerful statistics. The Fed hiked into strength, stocks wobbled, then climbed.
The second reason is very different. Prices spike not because the economy is booming, but because something got scarce – a supply shock. And right now, that something is oil, the lifeblood of our economy.
When the Fed hikes into a supply shock, it’s not tapping the brakes on a roaring economy. It’s raising rates into an economy that expensive energy could slow from here – one where today’s solid job market may not stay that way. Remember, while unemployment is low, this is – as former Fed Chair Powell often said – a “low hire, low fire” jobs market. Perhaps less sturdy than the headline unemployment number suggests. Hiking in this environment is a far more dangerous setup.
And it brings us back to a detail we flagged yesterday…
Remember the one ugly outcome in all that bullish data? It was 2022. We noted it came during an inflation-driven scramble, with the Fed slamming on the brakes to catch up.
That wasn’t a random outlier. It broke the pattern for precisely the reason this cycle might: Inflation, not strength, was driving the Fed’s hand.
To be clear, I’m not reversing yesterday’s optimism – I’m just filling in some details. The question isn’t whether the first hike breaks the bull. History says it won’t. The question is what happens if this isn’t a “one and done,” but rather, the start of a supply-driven rate-hike campaign – the rare kind the reassuring averages don’t cover.
The risk we’re watching
Raising rates into a supply shock – with the risk it eventually cracks a still-solid labor market – is the textbook recipe for stagflation: the toxic mix of stubborn inflation and stalling growth. It’s the ghost of the 1970s, when soaring oil prices and a cornered Fed combined to punish stocks for years.
I’m not predicting that outcome. The economy today is more resilient, and the Fed is more experienced at fighting inflation than it was 50 years ago. But let’s not pretend the risk isn’t real. When energy is the driver, the Fed has fewer good options – because no interest rate can drill a new oil well or reopen a shipping lane.
So, what do you do with all this?
You don’t try to predict which way it breaks. You position for both.
The move that works either way
The good news is that you don’t need to know whether the months ahead will bring zero hikes or four. You just need to own the kind of companies that come out fine either way.
We see two qualities to look for. Think of them as the two ends of a barbell.
On one end: businesses built to handle higher rates.
These are companies whose success doesn’t depend on cheap money. They don’t need to borrow constantly to grow. They aren’t valued purely on profits promised a decade from now – the kind of stock that gets hit hardest when rates climb.
Instead, they generate real cash today, carry strong balance sheets, and in some cases actually benefit from higher rates. Banks, for one, tend to earn more as rates rise. So do companies tied to real assets and energy – the very corner of the market that thrive when supply is tight and prices are firm.
This is what legendary investor Louis Navellier looks for over at . He tunes out the noise and anchors to earnings power and fundamental strength. As we highlighted from Louis just yesterday in the Digest, you get rich by buying .
On the other end: businesses built to handle a squeezed consumer.
If inflation keeps grinding and the job market softens, households will feel it. Wallets tighten. And when that happens, you want to own the companies that can raise their prices without losing their customers – pricing power.
These are the dominant brands, the everyday staples, and the low-cost necessities people buy no matter what the economy is doing. When money gets tight, shoppers cut the extras, not the basics.
Circling back to Louis again, that staying power – the ability to raise prices and keep customers – is exactly the kind of dominance he looks for. For more on the specific dominators in Louis’ Growth Investor portfolio today, .
Put those two ends together and you have a portfolio that doesn’t live or die by the next Fed meeting. If inflation eases and the hikes end quickly, your fundamentally strong names ride the bull that yesterday promised. If inflation proves stubborn and the Fed keeps hiking, your pricing-power names hold the line while weaker companies buckle.
But what about my AI stocks?
A string of hikes won’t crush the earnings of the picks-and-shovels names powering the buildout – think chipmakers, optical and connectivity suppliers, and electrical-equipment firms. Their profits don’t come from cheap money. They come from hyperscaler spending. And the tech giants funding that buildout are running a strategic arms race financed out of mountains of cash, not debt.
But that doesn’t mean they’d come out of a rate-hiking cycle unscathed.
The further out a company’s profits stretch, the more its stock behaves like a long-dated bond – and nothing is more sensitive to rising rates.
Higher rates can shrink the multiple investors will pay, even when the earnings are strong (price is a function of earnings and the multiple investors are willing to pay for those earnings).
Remember, what sank many stocks in 2022 wasn’t rates alone. It was rates landing on companies whose earnings were vanishing or purely hypothetical to begin with.
So, this flips the question. For your AI stocks, interest rates are the second-order risk. The real risk is whether the hyperscaler spending faucet stays on. If it does, a hiking cycle will make them more volatile – they’ll swing on rate headlines – but it’s unlikely to break them, as long as the spending keeps flowing.
Wrapping up
This isn’t a call to run for cover – the bull likely has plenty of life left (though expect some heavy volatility along the way). It’s a call to make sure the stocks you own are built for the road ahead – a road that’s now looking likelier to run through higher rates and tighter household budgets.
We’ll keep tracking it here in the Digest.
Have a good evening,
Jeff Remsburg
