Profit From The Fed’s Misguided Forecast – XLY, XLE, XLI

| September 24, 2014

Federal ReserveOver the last few weeks, the Fed and other central banks around the globe have taken center stage in the financial world.

I’ve never seen more speculation about the Fed’s ‘dot plot’ about the committee member’s expectations for interest rates. In my opinion, it’s gotten a bit ridiculous.

In short, the latest data indicates that the Fed will raise interest rates faster than previously expected in 2016 and 2017.

One thing the Fed has proven time and time again is they can’t predict the future. In fact, they suck at it. Their predictions have proven to be too optimistic.

They’ve gotten it wrong about the pace of job growth, wage growth, economic growth, inflation, and just about everything else time and time again.

So why do we give these guys’ predictions about where interest rates will be in 18 to 30 months any thought at all?

What’s more, the one thing the Fed has proven to be is flexible and willing to change and adapt to economic data.

So we’re likely to see the Fed’s ‘dot plot’ change dramatically as the economic data doesn’t match the FOMC members expectations… and given their history, I’d say there’s about a 99.9% chance the Fed is wrong on this one too.

And I’m not the only one who thinks the Fed’s outlook for interest rates is wrong…

Just look at the market’s expectations for inflation over the next five years. Annual inflation expectations have fallen from about 2.1% in July to around 1.65% today.

In other words, the market thinks that if the Fed raises interest rates at the rate their new ‘dot plot’ indicates, they will kill economic growth, inflation will fall below their 2% target, and the US Dollar will continue to soar in value versus other global currencies.

Here’s the thing… none of that is going to happen.


Simple, the Fed’s not going to raise interest rates if there’s no inflation, if economic growth is stagnant, and if job growth doesn’t lead to wage growth.

They know inflation expectations are just as important, if not more important, than the current rate of inflation. The dramatic drop in inflation expectations for the next five years is sending the Fed a message. And it’s one they won’t ignore.

The bottom line is investors have overreacted to the latest Fed news. And we’ll likely see the Fed pull back from their slightly hawkish outlook.

As the Fed backtracks in the coming weeks, we’ll likely see a major reversal. Interest rate expectations will come down, inflation expectations will tick back toward 2%, and the US Dollar will weaken.

And more importantly, the same sectors that have be hit the hardest over the last few weeks will be the ones that bounce back the most.

The three US Sector ETFs that have been hit the hardest over the last month are Consumer Discretionary Select Sector SPDR (XLY), Energy Select Sector SPDR (XLE), and Industrial Select Sector SPDR (XLI).

If you’re looking for a way to profit from the Fed’s latest misguided forecast, I’d look at adding XLY, XLE, XLI, and any other ETF that has taken a beating. They should be the biggest winners when the Fed starts backtracking on their latest forecast.

Good Investing,

Corey Williams

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Category: ETFs, Sector ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets three times a week. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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