Who is Worried About Inflation? Not the Fed.
Cutting Rates and Higher for Longer?
The Fed is suggesting that rates will be higher for longer. They pushed rate cuts farther out on the dot plot but still maintained the idea of at least one cut this year. There was no mention of any rate hikes and they also increased their projections for GDP. It looks like the market and the economy are in a perfect goldilocks zone.
Basically, everything in the economy is just fine in the eyes of the Fed. With no reason to hike rates, they don't see inflation resurging. With the higher for longer narrative, they still see the economy growing at a steady, consistent pace.
So, if inflation and slow growth are not a worry, then this appears to be a no landing scinario. Based on the Fed's demenor, we are supposed to see economic growth without a resurgence in inflation. This is very good news for equity markets.
Bullish Reaction in Equity Markets
So far, the reaction in global markets looks perfect for equities in the current environment.
The major indices ripped following the Fed's interest rate decision. There was a little whipsaw action but there were no new intraday lows printed during the volatile price action.
The dollar is dropping from the lack of confidence in any resurgence of inflation or future rate hikes. Typically, a stronger dollar adds to any downward pressure towards equities.
Gold is ripping thanks to the falling dollar. Gold has been climbing with equities lately as prospects for lower interest rates lift the two asset groups.
Small caps are performing much stronger than their larger capped counterparts. As long as the Fed signals that rates will not go higher, this will be dovish for small caps. Especially companies that depend on debt financing for growth. Usually, when small cap indices are performing stronger than other larger capped equity indices, then this is a sign of a broader rally throughout the market with a large breadth of participation.
All ends of the yield curve moved closer towards normalization. This is due to the Fed's suggestion.that they will lower rates in the short term and keep longer-term rates steady for longer. The only thing that worries me is that past recessions were preceeded by a steepening yield curve. But, a recession doesn't follow every time. So far, I don't believe a recession will happen this time either.
Don't Anticipate the Market. Participate in the Market.
A lot of investors were anticipating a more hawkish Fed. I can absolutely see their reasoning with all of the recent hotter than expected inflationary data points and the jump up in energy prices. It can be very risky front running the Fed. You can rake in a lot more gains if you are right, but you can cause a lot of pain to your portfolio if you are wrong.
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Sianzsation : The rhymes participate don’t anticipate!
SpyderCallOP Sianzsation: makes it easy to remember.
73475104 : agreed
mypulse : Russell 2000 still seemed stucked, so market has not broadened... This rally is weird.
Kevin Matte : a lot of people that I follow on the internet (mostly youtubers) say that from April/May/June there will be a crash in the market until 2025, of the order of -30 to -75%... A lot start to prepare for it. Personally, I don't believe there will be a "big crash" but rather a correction, and maybe not ^^
SpyderCallOP Kevin Matte: I have heard a lot of people saying things are going to come down a lot in May or June. I don't believe it yet until I see it. I can't see any reason why we should see a crash, YET.
SpyderCallOP mypulse: You could say that when this rally in IWM broke out to the upside, then it was the market broadening out its rally into small caps. At least that is how I am seeing it.
mypulse : I'm not confident that the breakout can sustain. oh well
SpyderCallOP mypulse: You could be right. If interest rates come down, then it would be really good for a lot of companies in the Russell. Or, if investors believe that rates will come down in the future, then they might bid up the price well before the actual rate cut happens. Then again, if inflation comes back in a big way, then we might see some selling in the Russell as investors might think that their rate cut isn't happening or will happen at a much later date than expected.
That is basically how I am looking at the Russell right now. I could always be wrong, of course.
SpyderCallOP mypulse: I am still seeing a broadening rally. Are you seeing it yet?
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