Okay folks, so in this video, I want to walk you through some alarming data and then we have to talk about the increasing tide of bank analysts upping their projections on interest rate hikes this year and what history says about the success of their previous predictions. We'll go line by line through their forecasts and their reasoning behind them with the Fed Fund futures. According to Bloomberg Professional showing that the market is pricing in about six to eight rate hikes in 2022 and 2023, it's very, very important to talk about whether it's actually going to come in over expectations or under expectations because both have very, very big consequences for the market. But first, a word from our sponsor Zip Trader: you: if you are looking to learn how to analyze stocks and trade With our step-by-step lessons, our private chat, our daily morning briefings, as well as our fully updated price target list.

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Thank you Charlie for sponsoring this video and spicing up our Valentine's Day. Now back to the content. Okay, before we get into rate hike expectations versus reality, let's talk about what's worrisome when it comes down to the market's ability to predict the future of rate hikes. Shout out to Cme Group and Bloomberg for the infographics, but from 94 to 95 investors priced in 125 basis points and instead got 300 basis points in 99.

They priced in 50 basis points and instead got 175 basis points, which we know how that one ended in 2004 through 2006 markets expected 300 basis points and got 425 instead. In 2015, they priced in 150 basis points, but got instead 225.. So if you're following what the data is saying, well, in every one of the past four tightening cycles, the Fed has actually raised rates 75 to 125 basis points more than the market had expected, which if you extend that out to the current day predictions, which is again six to eight quarter point rate hikes, finishing off at around 1.625 percent by the end of 2023. Well, if the trend continues, you'd expect the market to once again be under factoring in how much the Fed is going to raise rates, which obviously is something that causes the market to be more anxious and becomes a self-fulfilling prophecy, and that if analysts know that the market has a habit of under factoring in Fed's actions, well, they're going to go and try to over factor in Fed's actions.

Other equally valid counter arguments would be that in the past, when we've raised interest rates, inflationary pressures weren't as out of whack, informing the market constantly of the pressure on the Fed to raise interest rates when inflation's at four decade highs, Analysts fear on Fed tightening is also at four decade highs. Markets in the past had to guess at how adamant the Fed was at actually raising interest rates because they weren't being forced to raise interest rates. But in this environment, markets are thinking the Fed's going to be forced to by continuing out of control inflation. Now, my point of view is this times different because you actually have a lot of disagreements in terms of how strong the economy is going to be this year.

In fact, my point of view is that the economy is going to slow down in Q2 and Q3 like a lot of companies are guiding for, and that in and of itself is going to cause the Fed to be a little bit less hawkish. But the problem is, there's so many different opinions right now because there's so many different ways of looking at the data and the data that we're actually getting is very, very flawed. Think about it this way: the Fed has two mandates. Number one is to support maximum employment, healthy job numbers, and then number two is to manage pricing pressures, right? So when analysts are trying to factor in what the Fed's going to do, they look at those two metrics.

But the way that those metrics are recorded are very, very flawed. Just take employment. The last report in January was a surprising beat. You got pretty good numbers and we get these reports every single month and people use these reports to make their decisions on what to buy or sell.

But the problem is that the way that these reports work is they're preliminary. You get these reports based on preliminary analysis and then the agency if they see an actual discrepancy in their real data, will then go back and revise it. If you look at the previously and originally published preliminary numbers in the lighter colored version of the chart, and then you look at what the actual numbers are. When they're revised, you can see the real numbers vary a lot.

In some cases, like in December and November, the jobs numbers were significantly higher than actually reported, and in others like May, June, and July, the numbers were significantly lower than actually reported. These discrepancies have an incredibly big impact on how people are trading, and seldomly were they accurate last year, which kind of calls into question the point of even using these data sets if you're a politician or an economist or a bank trying to make an analysis. Not to mention that the way of calculating the revised numbers are also kind of foofy. For example, January's report adjusted out a lot of lost jobs by simply designating them as seasonal jobs that are lost seasonally.

And look, that's something that has to happen every year because there are some jobs that, quite frankly are seasonal, but there's a limit to that. If you designate every lost job as a seasonal job, then you could always say that you're adding jobs right because the overall labor pool's going down because you just adjusted them out. If you use this kind of voodoo math back in March of 2020, you could have just adjusted every single job loss as a seasonal job loss, and we were actually at full employment. And while not that extreme, unfortunately, that is what we're seeing in terms of these data sets.

The preliminary data is oftentimes wrong, and the way that they adjust for the actual data can also be very misleading. One of the interesting things that you're starting to see right now is this variance between what the government is reporting and what companies are reporting. Companies that are actually in the economy are showing guidance for lower and lower quarters, slowing economic growth, whereas government estimates are like, yeah, everything's really, really good right now, but in reality, if you really look behind the scenes, there's been many times where government data has been very, very off in terms of these damn job numbers. So when you have the market trying to speculate on what's happening next, there's a lot of smoke and mirrors about what's actually happening now, which makes it even harder to get an accurate analysis.

But anyway, some things to keep in mind when we go through these bank and analyst predictions: So Bank of America sees some of the highest level of rate hikes: 11 rate hikes in 2022 and 2023 Seven in 2022. They said the economy is not just hitting the Fed's goals, it's blowing through the stop signs. The unemployment rate is still falling steadily, inflation has moved well above target and is likely to stick above target even as supply constraints are removed. They think the biggest issue is balance sheet tightening, which quote paves the way for lower returns for stock indices.

They see bullish sectors being semiconductors, chip equipment manufacturers, entertainment, air, freight, and logistics, as well as construction materials. so they are kind of projecting the bullish sectors are going to be the same as they were in 2021. They think that a combination of low interest rates, stimulus funds, and tight labor markets are fueling inflation. Thus, those are the things that are needed to get rid of set inflation.

The question that I'd have to point to here is with stimulus in the past, and if interest rates actually go up at the pace that they're suggesting, they'll go up and with labor markets already demanding much higher wages at the same time where consumers aren't willing to pay higher and higher prices, which suggest lowering profit margins for companies? Doesn't that signal that inflationary pressures and economic data is going to go down in the second half of 2022, at which point that would cause the Fed to stop and think? But in any case, they do think that tightening is going to put a dent in the market, but ultimately won't slow the economy's overall growth. Now, Goldman Sachs takes the approach that we will see four rate hikes in 2022, three rate hikes in 2023, and that will end us at 2.5 to 2.75 percent at 2024.. It's interesting that they're saying this because not long ago they were saying we wouldn't have any interest rate hikes until 2025.. But nonetheless, they expect the Fed to return to a quarterly pace in the fourth Quarter with one hike in December to end the year at 1.25 percent to 1.5 percent.

So they are insinuating that the Fed may decide to be more aggressive early on this year, perhaps to make a statement. Some people have speculated a 0.5 jump in March ending somewhere around 1.25 to 1.5 at the end of the year. They also think that unemployment is going to drop to 3.1 by the end of the year it was at 3.9 when they said that now it's at four percent, so they do believe that the job market will continue to do well. Jp Morgan is a bit more hawkish on rate hikes.

They think six or seven rate hikes could end 2022 as high as two percent, but the Ceo says growth will be the hottest since the Great Depression. But he did say that some companies are going to get payback for overconsumption in 2020 and 2021 like Meta, Netflix and Paypal have now. Barclays was one of the more dovish ones. They saw just three 25 basis point rate hikes leaving the year at zero point seven five percent to one percent.

So you certainly have a big mix here between these analysts. But one thing to keep in mind with most analysts and their forecasts is they tend to use models that extrapolate and focus on what's happening in the current day and then simply revise it when what's happening changes. Same thing with almost all economic health variables. They look at the current trend.

They predict that trends going to continue, and then that's their analysis. and then when the trend inevitably breaks, they just revise it. That's how a lot of analysts do things publicly. I don't know if they privately think that, I hope not, but at least that's what they're telling the markets and retail traders are basing their decisions on.

For example, a survey back in December of 2020 found that half of experts saw the Fed keeping zero interest rates until 2024.. and only 13 of them saw any hike above zero in 2022. Why did they think that? well? Because they were just projecting the current trend, the Fed had set interest rates at record lows, and inflation was basically under control at that point. Yep, Okay, that's the base case for the next five years.

Interest rates aren't going up. Inflation's not going to change, but now you look at a recent take and it shows that's flipped 93 of economists Now see the Fed lifting rates more than once in 2022. only 13 in 2020. Thought you'd see interest rate hikes in 2022..

now 93 think they're going to raise rates more than once. In other words, analysts tend to use models that basically make them trend chasers. They just identify a trend change, and they say that that's the new eternal trend that we're on. And then when the trend inevitably changes, which they always change, then all of a sudden they just revise their estimates.

If you change your estimates for what's going to happen before 2024, five times before 2024 is even here, then the odds of you being right are very, very high. Obviously, unprecedented times are very, very hard to gauge and they're allowed to be wrong. But the problem is that retail traders and really the overall market look at this and say, okay, we better follow the experts at the end of the day, if you look at all this data, it seems pretty obvious that nobody really knows what's going to be happening. The Fed themselves said as much.

There's a lot of decisions that haven't been made, which creates a lot of smoke and mirrors for how the market's going to be trading. And my take is that eventually the pacifier does have to be removed. the Fed does need to tighten. It's better for us to have a strong economy where the Fed is able to tighten at a pace that's reasonable and logical, but I don't think that's going to happen.

I think you're going to see a slowdown like a lot of companies are guiding for, and I think the Fed is probably going to be a lot less hawkish than people are factoring in. That's going to create an opportunity to build a lot of value in sectors that have been beat down to historical lows. and it's also going to create a lot of racketing for companies that have over factored in this perfect economy that some of the misleading data is suggesting we're heading into at the end of the day. I think that over the long run we're going to get on a very, very healthy trajectory, but this year is a lot a lot more unpredictable than people may be making it out to be.

But what we do know is that history shows that short run performance is based on multiples that the market is willing to reward. and that's based on a lot of factors that we don't really have much control in predicting, like the capital environment, what the Fed does, inflationary pressures, but over the long run returns are based on actual revenue growth and future profitability. Some things to keep in mind in these uncertain times. Anyways, if you have any questions, feel free to reach out to us below or join us on Ziptrader Circle.

If you are looking to join Ziptrader, you make sure to check it out below. We do have our coupon code Valentine starting today and ending midnight on Monday, which is Valentine's Day. So if you are looking to learn how to trade and analyze stocks with our step-by-step lessons, our private chat, our daily morning briefings as well as our updated price target list and have lifetime access to those things, make sure to go ahead and check it out in the link below. Have a good one and I'll see you in the next video.

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