Nothing can stop the stock market – not even the Federal Reserve. Don't expect the rally to end here.
Last week, if investors wanted an excuse to take money off the table, they got one. On Wednesday, the Fed announced, as expected, a pause in its rate hikes with a very big “but” – its so-called dot plot signaling another two quarter-point hikes before it is implemented.
Logic would say that this should have pushed the market lower. The
S&P 500 index
The US dollar is already up 20% from its bear market low on Wednesday, with much of this rally fueled by hopes that the Fed would hit the pause button. At the very least, there should have been a “sell the news” reaction to accompany the bad news – the possibility, perhaps even the likelihood, of further rate hikes.
There wasn't. The S&P 500 gained 2.6% on the week during the
Dow Jones Industrial Average
rose 1.3% and the
increased by 3.2%.
So why all the buying? The Fed is still on the verge of completing rate hikes that would allow economic growth and corporate earnings to stabilize and even pick up in many sectors. Meanwhile, bond market rates could fall.
“The smoke hasn't cleared, but the momentum market remains,” writes Evercore ISI strategist Julian Emanuel.
That was enough for the S&P 500 to clear several key levels. After breaking through 4200 weeks ago, it is now well above 4300, where it peaked in August after Fed Chair Jerome Powell broke a summer rally by reminding markets that rate hikes are a long way off be completed. It ended Friday just below Thursday's close at 4425, its highest since April 2022, a sign that market participants are confident enough about the prospects to continue buying shares.
The risk seems low, at least for now. After nearly a dozen attempts to break 4200 year-to-date, this number should become the support level for the S&P 500 on a decline. And if it stays that way, the S&P 500 would likely be preparing for another rally right now.
BCA Research chief strategist Doug Peta calls 4200 “clearly quite a level.” The S&P 500 couldn't survive. Once that is the case, resistance becomes support.”
The market is never risk-free, and it certainly isn't now. This year's gains were sustained by only a handful of stocks, which poses a risk if those stocks were to falter. The S&P 500 also trades at 19 times 12-month forward earnings, while government bond yields are as high as 5%, making stock returns less attractive.
“I think valuations are on the high side historically relative to macro risk and interest rates,” said Keith Lerner, co-chief investment officer at
But in order for the market to experience a meaningful decline, it would clearly need a real catalyst. This could come in the form of bad economic data or earnings. With “the delayed impact of monetary tightening and an imminent recession, earnings expectations will be set for disappointment,” says Peta. “Then stock performance becomes really fragile.”
However, not yet. With the market having tailwinds, a decline would merely present a buying opportunity, especially if the market remains at key levels. “We think pullbacks here present buying opportunities,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
While it's usually not worth fighting the Fed, this is one of those moments when you don't want to fight the ribbon.
write to Jacob Sonenshine at [email protected]