This morning, we did receive a few reports of note on the economy, but the market is still being driven by the Federal Reserve’s monetary policy announcement yesterday afternoon (more below). At 8:30 A.M. (EDT), the Labor Department reported that initial unemployment claims for the week ending March 15th totaled 223,000, which was up slightly from the prior week’s revised tally, but still indicative of a tight labor market. Meanwhile, the Philadelphia Fed said that manufacturing activity in the greater Philadelphia area was 12.5, which was down from the prior month reading of 18.1, but still in positive territory. Elsewhere, the Bank of England left interest rates unchanged this morning, citing global trade uncertainty as a reason for keeping its benchmark rate at 4.50%. At 10:00 A.M., we will get the leading economic indicators data from the Department of Commerce. The equity futures, which were lower heading into the economic releases, following yesterday’s late-afternoon rally, are still presaging some selling when trading kicks off stateside.
The Federal Reserve did what was expected at the March Federal Open Market Committee (FOMC) meeting, leaving the federal funds rate unchanged in the range of 4.25% to 4.50%. In addition, the central bank lowered its GDP outlook for 2025 (from 2.1% to 1.7%) and raised its forecast for inflation (from 2.5% to 2.8%), citing uncertainty about the Trump Administration’s tariffs policies. With regard to labor, the Fed said there was no real change in the condition of the jobs market, noting that unemployment has stabilized, and the overall labor market remains solid. Federal Reserve Chairman Jerome Powell said that the labor market “remains in balance” and that did not put any pressure on the Fed to cut interest rates during this month’s meeting.
The Fed statement and the FOMC’s interest-rate dot-plot data also kept the narrative in place that the central bank will cut the federal funds rate two times this year. This, along with the announcement that the central bank will reduce the monthly runoff (sales) of Treasury securities from $25 billion to $5 billion beginning in April was seen as a less-hawkish stance. Slowing the pace of the balance sheet reduction would in effect decrease the scope of quantitative tightening. This put downward pressure on Treasury market yields and helped the equity averages extend the gains that they were holding heading into the FOMC decision, through yesterday’s closing bell. For the day, the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index rallied 383, 247, and 61 points, respectively, with significant buying seen in the recently out-of-favor technology sector. The possibility of lower rates moving forward would be seen as a positive development for the stocks of the higher-growth companies.
During the post-meeting press conference, Chairman Powell reiterated that the Federal Reserve wants to take a wait-and-see approach with regard to monetary policy, as it assesses the impact of the Trump Administration’s tariffs on imports and ultimately the pace of price growth at the producer and consumer levels. The Fed leader also said that the risk of a recession still remains low, so the need to move on the rate-reduction front was not warranted at this time. The Fed’s monetary policy remains in a good place to react to what comes in the months ahead and Chairman Powell noted the impact of tariffs on inflation could prove to be transitory in nature. Mr. Powell did acknowledge that the central bank has seen a slowing in consumer spending, which coincides with some of the recent consumer sentiment data. Given this backdrop, the consumer discretionary stocks may have some trouble recovering from the effects of the recent broader market selloff.
Overall, the CBOE Volatility Index (or VIX), also known as the “fear gauge,” fell notably following yesterday’s FOMC decision, and the S&P 500 Index is still tracking toward its first positive week in over a month. That said, with consumers still nervous about the near-term effects of tariffs on the price of goods, volatility in the U.S. stock market is likely to remain heightened. Even after pulling back on the Fed news, the VIX is still up nearly 20% calendar year to date. In this environment some caution is warranted and investors may be well served by looking at the stocks of high-quality companies that have demonstrated a history of delivering steady earnings and cash flow growth. - William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
