{"id":39453,"date":"2023-07-23T13:05:18","date_gmt":"2023-07-23T17:05:18","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/stocks-are-making-a-run-for-record-territory-will-the-fed-end-its-rate-hikes-anyway\/"},"modified":"2023-07-23T13:05:20","modified_gmt":"2023-07-23T17:05:20","slug":"stocks-are-making-a-run-for-record-territory-will-the-fed-end-its-rate-hikes-anyway","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=39453","title":{"rendered":"Stocks are making a run for record territory. Will the Fed end its rate hikes anyway?"},"content":{"rendered":"
Stocks have been closing in on record territory, which isn\u2019t supposed to be a key worry of the Federal Reserve. <\/p>\n
But after a dizzying three years of pandemic extremes, the stock rally has become a source of market angst, right as the Fed attempts a final chapter in its epic rate hiking saga.<\/p>\n
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\u201cThere is still a lot of money floating around that\u2019s still in the economy,\u201d said Colin Graham, head of multiasset strategies at Robeco.\u00a0\u201cThey are going to have to speed up QT, or push rates higher to see that liquidity drain faster.\u201d<\/p>\n
QT is shorthand for quantitative tightening, or shrinking of the Fed\u2019s balance sheet, which swelled to almost $9 trillion during the pandemic with monthly bond purchases. It has been shrinking it to about $8.3 trillion as bonds mature.<\/p>\n
As a counterweight, there\u2019s the \u201cwealth effect,\u201d suggesting that households become richer as higher stock prices climb, boosting spending. Low pandemic rates also encouraged a borrowing blitz by homeowners and corporations. Those long-term, fixed costs provide a huge buffer from the Fed\u2019s rate hikes since 2022.<\/p>\n
\u201cThe stock market continues to gallop higher,\u201d said Sal Guatieri, senior economist at BMO Financial Group in Toronto. If surprising gains in home prices and stocks continue, \u201cWe could end up with much looser financial conditions and might make the Fed\u2019s job more difficult overall,\u201d he said.<\/p>\n
That could mean further rate increases may be needed, Guatieri said, which might increase the risk of a hard economic landing. <\/p>\n
See:<\/strong> Why the Fed may be less likely to oppose a stock market rally than investors think \u2014 \u2018unless it gets out of hand\u2019<\/p>\n
One more hike?<\/h2>\n
The Fed has made promising headway in bringing inflation down, with U.S. consumer prices rising 3% in June on a yearly basis, down from a 9.1% peak last year. It wants the rate at a 2% annual target.<\/p>\n
\u201cThe Fed had a much tougher job than it usually does,\u201d said Don Townswick, director of equity strategies at Conning, in a phone interview. \u201cBecause it finally appears to be working, that\u2019s why the market is doing well.\u201d<\/p>\n
It also helps that second-quarter earnings have largely held up, albeit based on lowered expectations and profits that are expected to fall for a third straight quarter. \u201cLast, but not least, we haven\u2019t seen the economy being knocked down to negative,\u201d Townswick said. \u201cWe might even narrowly avoid a recession.\u201d <\/p>\n
Both the S&P 500 index \n SPX, \n +0.03%<\/bg-quote> \n and Dow Jones Industrial Average \n DJIA, \n +0.01%<\/bg-quote> \n ended Friday less than 5.5% from the highs put in months before the Fed began in March 2022 its most aggressive rate-hiking campaigns in decades. <\/p>\n
Still, rising rates (blue line) and tighter financial conditions typically don\u2019t bode well for stock portfolios, with most tightening cycles resulting in recessions (gray lines) since 1970.<\/p>\n
<\/p>\n<\/p>\n<\/figure><\/div>\n
The Fed already raised its policy rate to a 5%-5.25% range, the highest since 2007, in a quick 16 months. The central bank is expected to fire off another rate increase of 25 basis points on Wednesday, but then perhaps be done.<\/p>\n
Read:<\/strong> Everyone thinks the Fed\u2019s rate hike next week will be the final one \u2014 except the Fed<\/p>\n
Yet, with many investors still bracing for the worst, here we are. Gains this year have blunted the blow of the brutal 2022 selloff, bonds have been kicking off attractive yields and optimism around the ability of the U.S. economy to bypass a recession has grown.<\/p>\n
\u201cIn a rate-hiking cycle, it\u2019s always dangerous to say this time is different,\u201d said Townswick. \u201cBut the most recent inflation numbers have made it easier to worry less.\u201d <\/p>\n
The Dow on Friday eked out its 10th day in a row of gains, ending the week up 2.1%, according to Dow Jones Market Data. The S&P 500 gained 0.7% for the week, while the Nasdaq Composite Index \n COMP, \n -0.22%<\/bg-quote> \n shed 0.6% in the past five session.<\/p>\n
\u201cFrom the Fed\u2019s perspective, they just need to balance out if they want to push the economy into a recession or not, or give more time for rate hikes to play out,\u201d said Charlie Ripley, senior investment strategist at Allianz Investment Management.\u00a0<\/p>\n
But he also expects headwinds to consumer spending in the coming quarters, including as the pause in student loan payments ends this fall, and potentially for some areas of the broader indexes to underperform.<\/p>\n
\u201cThere are some pockets that look a little frothy,\u201d Ripley said of equities, especially with seven or eight companies driving major indexes higher. Shares of high-growth Tesla Inc. \n TSLA, \n -1.10%<\/bg-quote> \n fell 7.6% for the week, after it reported earnings, but were still 111.1% higher on the year, according to FactSet.<\/p>\n
Graham at Robeco, which has been slightly underweight equities in the past six months, had a gloomier outlook. \u201cThis is what happens coming into a recession. Everything looks fine, and suddenly it\u2019s not.\u201d<\/p>\n
The big event ahead for markets will be the conclusion of the Fed\u2019s two-day meeting on Wednesday. Manufacturing data is the highlight on Monday and a U.S. home price update for May is set for Tuesday. Friday brings another inflation update with the June Personal Consumption-Expenditure Index.<\/p>\n