The attention of Wall Street is on the Federal Reserve and its battle to tame inflation this morning. That is because the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting yesterday afternoon. The FOMC did the expected, leaving the federal funds rate unchanged at 5.25% to 5.50%. However, the central bank did take a more-dovish-than-expected stance, saying that the possibility of three interest-rate cuts in 2024 remains on the table and adding that it may slow the pace of bond selling later this year. Sales of bonds by the Fed take cash out of the economy, tending to constrain growth. The lead bank noted that inflation has eased, but still remains elevated and that it won’t start to reduce the federal funds rate until there is some further confidence that prices are coming down. In his post-decision press conference, Federal Reserve Chairman Jerome Powell said that supply and demand conditions have continued to come into better balance and the economy has made considerable progress toward the Fed’s dual mandate of economic growth with limited inflation.
The Fed statement was viewed as a “goldilocks report” by Wall Street. In addition to keeping the possibility of three rate cuts in play, the central bank raised its outlook for the U.S. economy, noting that job gains remain strong. In all, the Fed now looks for the gross domestic product (GDP) to expand by 2.1% this year, up sharply from its previous forecast of a 1.4% gain.
The major equity averages, which were relatively unchanged heading into the Fed statement, moved notably higher on the Fed news, with the broader S&P 500 Index topping the 5,200 mark for the first time, and equity futures indicate that such gains will extend further this morning. The Dow Jones Industrials and the tech-heavy NASDAQ Composite also climbed more than 1% on the day, but the leadership came from the small-cap sector, with the Russell 2000 Index up roughly 2%. The interest-rate sensitive groups got a boost from the more-dovish Federal Reserve talk. In particular, the technology, communication services, and consumer discretionary sectors performed very well yesterday, taking another step higher. The yield on the benchmark 10-year Treasury note, which was hovering around 4.30% heading into the Fed decision, retreated on the report and Fed Chairman Powell’s commentary. The falling yields provided a boost to equities.
We did get some economic news today, including the latest data on weekly unemployment claims. Specifically, the Labor Department reported that jobless claims for the week ending March 16th totaled 210,000, up 1,000 from the prior week and still indicative of a tight labor market. This is notable, especially after the nation’s unemployment rate ticked up last month (from 3.7% to 3.9%). That is because the increase in the rate is being driven by more people entering the workforce, not by any spike in layoffs, the latter of which would suggest a weakening labor market. Chairman Jerome Powell said that demand for labor still exceeds the supply of available workers. Also this morning, we learned that manufacturing activity in the greater Philadelphia area climbed 3.2% last month; the consensus was calling for a 5% decline. At 10:00 A.M. (EDT), the Commerce Department will release existing home sales data for the month of February.
So what is an investor to do in this environment? With market valuations looking quite frothy these days even with the support from the Fed, and the CBOE Volatility Index (or VIX) trading at a level that suggests the market is overbought, one would think some caution is warranted. However, the age-old adage, “don’t fight the Fed” may be the best advice to consider right now. Chairman Jerome Powell, as noted above, said that the Fed will probably begin reducing interest rates this year, along with slowing its quantitative tightening program (bond selling). Historically, equities perform well in this environment and would likely be expected to do so again in the coming months, especially if the economy continues to hold up. From an investment perspective, we continue to like the stocks of high-quality companies that are less prone to deliver disappointing earnings results, which could potentially trigger some selling with equity valuations looking extended. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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