Sometimes the market hears what it wants to hear and then storms higher (or lower) on what is little more than a hint. In the short run that doesn’t much matter since the oftentimes huge gains are real and investors can and do take them to the bank. In the somewhat longer run, markets often do take time to reconsider.
U.S. stocks roared higher this afternoon on what the market heard as a hint in a speech from Federal Reserve chair Jerome Powell that the central bank would back off on its schedule for interest rate increases in 2019. The Standard & Poor’s 500, which was up only 0.43% as of noon New York time, closed ahead 2.30%. The Dow Jones Industrial Average moved from 0.78% ahead at noon to close 2.50% higher. The NASDAQ Composite finished the day up 2.95% (after showing a gain of just 0.51% at noon.) The small cap Russell 2000, which had been in the red by 0.16% as of noon, closed with a gain of 2.47%.
The day and night difference between morning and afternoon? A speech by Federal Reserve chair Powell that included a line that “suggested” that the Federal Reserve would pause the bank’s interest rate increases in 2019.
The market was certainly right in hearing something different. Back on October 3 Powell had said that the Fed’s interest rate increases “may go past neutral. But we’re a long way from neutral at this point, probably.”
Today, Powell indicated that the Fed sees the market neutral interest rate–the rate that doesn’t provide monetary stimulus to the economy and the financial markets–as much, much closer. Current interest rates are “just below” a range of estimates for the neutral interest rate level. The Fed’s benchmark rate was “just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.”
After Powell’s remarks the market still believes that the Fed will raise interest rates another 25 basis points at its December 19 meeting from the current range of 2.00% to 2.25%.
But the market is more convinced than ever that the Fed won’t meet its earlier schedule for three interest rate increases in 2019.
Powell’s speech certainly wasn’t factored into my recent thinking when I called for an end of the year bounce–see my two recent posts on my JubakAM.com subscription site giving you 5 bounce and 5 “bigger bounce picks–and a strong January Effect Rally. But a bounce is indeed what we have at the moment.
An especially negative outcome for the trade talks between Presidents Donald Trump and Xi Jinping this coming weekend could end this bounce. But in the context of an ongoing bounce, frankly, the market is likely to regard the talks as a success with very little evidence.
In other words, the bounce so far this week adds to the odds that the bounce will continue past this weekend.
