This week’s reaction to the Federal Reserve’s interest-rate announcement offers evidence that the bank is moving from the stock market’s biggest problem to a force that can unleash more gains.
If there’s one thing investors know, it is that the Fed’s effort to rein in inflation by raising interest rates was the biggest reason behind stocks’ plunge last year. The
S&P 500
fell about 25% from its record closing high in January 2022 to its low point in October as the fed-funds rate took off.
That’s not the case anymore. Wednesday, the bank lifted its fed-funds rate target by another quarter point, leaving it at 5.25%-5.50%, but stocks didn’t waver. The S&P 500 was flat—not down—even after the Fed announced the rate increase. The market is forward-looking, and it sees the central bank becoming a tailwind.
Policy makers may raise rates one more time—Fed Chairman Jerome Powell says more increases than that could be needed—but investors and Fed officials alike believe the bank is almost finished with its monetary tightening campaign, and has a chance to do the near impossible—engineer a soft landing.
Powell said the Fed’s next move will depend on the economic news, which means the bank will only hike rates if inflation is too high and will hold off if it keeps cooling enough. The corollary is that corporate profits can grow next year if demand remains firm. Investors are already taking a more upbeat view, which has combined with hope about artificial intelligence to lift the S&P 500 by about 29% from its low.
To be sure, the market has become more expensive now, making it vulnerable to a healthy correction, but it could still move higher on positive economic developments, such as a Fed backing away from tightening.
“The market’s expectation that the Fed is very close to being done with rate hikes was one of the three pillars of the 2023 stock market rally, and following the FOMC decision that pillar remains in place,” wrote Sevens Report’s Tom Essaye in a research note published Thursday morning. “That means that what we saw in the markets prior to the Fed should continue as long as there are no major surprises in the economic data.”
And that’s exactly what the market is doing. The S&P 500 was up 0.6% just past midday on Thursday, demonstrating once again that the Fed, far from hurting the stock market, is now helping it.
Write to Jacob Sonenshine at [email protected]
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