Fed Uncertainty… When policymakers are unsure about what to do about rate hikes next, their unease often spreads to the markets, but not this time. The U.S. Federal Reserve (Fed) and the Federal Open Market Committee were both confident about their plan to hike interest rates late last year, which was one factor in the broad-based selloff we saw for the first six weeks of the year.
But now as they show signs of altering their plans, investors are getting the ball rolling again.
Fed Uncertainty – Market correction coming to an end
Gluskin Sheff Chief Economist and Strategist Dave Rosenberg noted in his daily “Breakfast with Dave” report on Thursday that in addition to the first three-day winning streak of this year for the U.S. averages, this week also brought the biggest daily increase in four years at more than 1% per session. Transportation surged 6.4% over three days, leading the way in U.S. stocks. Further, he said volumes are picking up, which indicates that investors are becoming more convicted.
He highlights several green lights in the markets right now with oil driving equity futures in the U.S. as prices climb and the U.S. dollar starts to hold back. Meanwhile worries about a recession are starting to abate, and he expects other parts of the market to rally even further. He summed it up with:
“The better tone to the loonie is one part oil and one part Fed as the FOMC minutes that were released yesterday [Wednesday] validated the view that U.S monetary officials in aggregate see that ‘uncertainty has increased’ and the majority see ‘downside risks’ to the outlook.”
In other words, he says right now the Fed is dovish, and apparently the markets like that as Fed fund futures are pricing in a 40% chance for a rate hike. However,
Fed Uncertainty – Bear market rally or a rally with staying power?
Rosenberg noted earlier this week a massive gap between what policy makers were planning and what the markets were pricing in, and that gap still exists now. In fact, it may have widened as the markets rebounded this week. In fact, we haven’t seen a rally of this magnitude since August 2015, notes Rosenberg, but it remains to be seen whether this rally will continue.
“It is way too early to make a complete assessment as to whether all we are seeing is a bear market rally,” he wrote. “Even if that is the case, it would mean that we are just at the halfway point of what is still a countertrend bounce, and if playing the peaks and valleys this year is the way to generate returns, then so be it.”
He added that he would be encouraged if the S&P 500 breaks above 1,960 on the back of “strong volume and breadth” and if Financials and Cyclicals lead the way. Currently the markets are leaning slightly toward the bearish side according to the latest Investors Intelligence survey, but he also recalls that the reading is similar to what it was in Fall 2011 when the S&P 500 rallied 8.5% into the end of the year. Additionally, he said all it took for the markets to recover was for sentiment to rebound.
Fed Uncertainty emphasized
The market rally comes at a time with the Fed is extremely uncertain about the economy and what to do about rate hikes. Rosenberg said the January meeting FOMC notes referenced the word “uncertain” or any of its derivatives 24 times, which he called “by far the highest tally in recent history.”
Market watchers could be interpreting this uncertainty as signaling the potential for a reversal of the rate hike plan set forth late last year. Such a reversal could mean we will see fewer rate hikes this year than what policymakers were previously planning—something the markets would probably like to see.