- To no one’s surprise, the Fed raised rates by 0.75 percentage points this week, with further hikes expected through 2022 and into 2023
- Mortgage rates have soared on the back of rate increases, with the average 30-year fixed mortgage now at 6.35% from just over 3% at the start of 2022.
- The technology remains unloved by the market, although it still generates billions of dollars in revenue, presenting an opportunity for investors
- Top weekly and monthly trades
To subscribe to the Forbes AI Newsletter to stay up to date and get our AI-powered investment insights, breaking news and more delivered straight to your inbox every weekend.
Major events that may affect your portfolio
The long-awaited meeting of the Federal Open Market Committee (FOMC) finally took place this week and the hard facts really came as no surprise to anyone. The Fed raised rates by 0.75 percentage points, exactly what markets and analysts expected.
It is the third consecutive rate hike that takes the base rate to its highest level since before the 2008 global financial crisis.
This rise was indeed already priced into the markets, from stocks to bonds and even mortgages. What wasn’t necessarily so clear before the announcement was the Fed’s outlook for the state of the economy going forward.
Data and commentary do not make for pleasant reading.
Their projections show that economic growth will stagnate at just 0.2% for 2022 before improving slightly in 2023 to 1.2% for the year. Still not great. Unemployment has been notoriously low as employers face a tight job market, but that is set to change slowly with the jobless rate expected to rise from 3.7% to 4.4% in 2023.
Despite these disappointing numbers, the plan is still to raise interest rates in the coming months, with the Fed suggesting the base rate could rise to 4.6% in 2024.
The prospect of the Fed putting the brakes on an economy that already appears to be headed for a recession understandably spooked markets, and we have seen significant declines this week following the announcement.
Of course, the reason behind all this is to try to control inflation. So far, the Fed expects these measures to be able to do just that, with the key rate expected to fall back to between 2.6% and 3.5% in 2023.
One of the biggest concerns about the direction of rates is the impact on the housing market. Currently, the average rate for a 30-year fixed rate mortgage is 6.35%. This is a significant increase from the start of 2022, when the average rate was just over 3%.
This means that new home purchases have become much more expensive. Here’s an idea of how much more expensive.
At a mortgage interest rate of 3% and a term of 30 years, a $500,000 loan would cost a borrower just over $2,100 per month. Right now, that same loan at the new average rate of 6.35% will cost over $3,100 a month.
That’s $1,000 more each month, at a time when the economy is collapsing and inflation remains at record highs.
This is not good news for the housing market and Fed Chairman Jerome Powell said so in the recent announcement. Powell said the housing sector was likely to undergo a correction after experiencing a period of “burning” prices.
It is not surprising to hear this view, considering that the Fed is likely to raise rates even further from their current level.
This week’s flagship theme from Q.ai
The tech has been selling for a while now, but there have been signs of life coming back. Many companies in the sector rebounded strongly in July and early August, and have retreated slightly in recent weeks.
Still, companies at the top of the tech tree are likely not going anywhere anytime soon. Companies like Apple, Amazon, Microsoft, and Google are still generating insane cash flow and continuing to grow and find new profit centers.
One theme we noticed at the start of 2022 was that the tech sector potentially sold more than it really should, especially compared to more traditional companies in the Dow Jones 30. While the industry has at times seemed overvalued in recent years, this rapid decline in prices presented an opportunity for investors.
The problem is that we probably won’t see smooth navigation in the overall market for some time.
Fortunately, we found a way to play on the technology while potentially reducing the downside risk of a general market downturn and incorporated it into the Tech Rally Kit.
It works through the use of pair trading that goes long on the technology sector by investing in a combination of the SPDR Communication Services Sector Fund (XLC) and the SPDR Selected Technology Sector Fund ( XLK) and runs on the Dow Jones 30 through the use of an inverted ETF.
These positions are rebalanced on a weekly basis and this means that investors can profit from the relative movement of technology towards the Dow Jones. Even if the overall market moves sideways or even down, investors can gain if the tech sector holds up better.
Best Business Ideas
Here are some of the best ideas our AI systems recommend for the week and month ahead.
Graftech International (EAF) – The industrial manufacturer is one of our Best Buys for the next week with an A grade in techniques and quality value. Revenues have increased by 48.2% over the past 12 months.
Enfusion Inc (ENFN) – Investment industry SAAS company is one of our Top Shorts for the next week with our AI giving them an F in our growth and technical factors. The company lost $176.4 million in the 12 months to June 30.
Clearfield Inc (CLFD) – Fiber Connectivity Company is one of our Best Buys next month with an A in our Quality Value and a B in Growth. Earnings per share increased 8.78% over the past 12 months.
Chemocentryx Inc (CCXI) – The biotechnology company remains one of our Top Shorts for the next month with our AI giving them an F in our low volatility, technical and quality value factors. Earnings per share are down 14.39% over the last 12 months.
Our AIs Next month’s top ETF trades is to invest in oil, VIX (volatility index) and high growth companies and to short China and the Pacific region. Best Buys are the United States Brent Oil Fund LP, the ARK Innovation ETF and the ETN iPath Series B S&P 500 VIX Short-Term Futures. Top Shorts are the iShares China Large-Cap ETF and the Vanguard FTSE Pacific ETF.
Recently Released Qbits
Do you want to learn more about investing or refine your existing knowledge? Qai publishes Qbits on our Learn Center, where you can define investment terms, unpack financial concepts, and improve your skill level.
Qbits are digestible, snackable investment content meant to break down complex concepts into plain language.
Check out some of our latest additions here:
All newsletter subscribers will receive a $100 sign-up bonus when they deposit $100 or more.