Rally Flag Keeps Waving As Market Builds On Yesterday's Fed Rally

After all the anticipation of a rate hike, stocks surged once the news hit the wire Wednesday. That was a bit of a surprise, considering how well the Fed telegraphed this 25-basis point increase. Stock futures pointed toward a higher open Thursday, helped in part by a slight recovery in oil prices from recent three-month lows.

The Fed seemed to satisfy bullish investors, raising rates as promised but not sounding too hawkish about future policy. Three rate hikes, including yesterday’s, remain the Fed’s 2017 plan for now, not four, as some economists started talking about earlier this week. The “dot matrix” of where Fed officials expect rates to be didn’t change much from last time, and CME futures showed chances of a fourth hike falling slightly to around 22%.

Basically, the Fed stuck with the script many people wanted to hear, and that helps explain the big rally to some degree. It may have simply reflected relief.

So now that the rate hike is reality and futures prices don’t point toward another one until June at the earliest, what is the market likely to focus on? It may be back to trading fiscal policy instead of monetary policy, with investors still waiting for more details behind the new administration’s tax and infrastructure plans.

Investors got a taste of at least one of the administration’s plans Wednesday, when President Trump directed the Environmental Protection Agency (EPA) to put aside aggressive fuel mileage targets for automakers. One thing the administration has promised is to remove regulatory burdens like that one from manufacturers, hoping to spur stronger growth.

But that was only a small part of all the economic promises the new administration has made, and some of the flat to weaker trading ahead of the Fed meeting might have reflected investors growing a little tired of waiting for more clarity.

One might assume that financial stocks, which often benefit from higher interest rates, would have been a major participant in Wednesday’s post-Fed rally. But the fact is, financials were among the worst performing sectors of the day, perhaps reflecting a buy-the-rumor, sell-the-fact type of trade. The financial sector is up more than 4% over the last month, outpacing the overall S&P 500  Index (SPX).

Instead, the strongest sectors turned out to be the embattled energy group — which rose more than 2% after a surprise weekly draw-down in U.S. oil stockpiles — along with some traditionally rate-sensitive sectors including utilities and real estate. The gains in real estate and utilities might reflect relief that the Fed stuck to its previous forecasts for just two more rate hikes this year and didn’t sound too hawkish.

On the data side, the January Job Openings and Labor Department Survey (JOLTS) report is due later this morning. The most recent JOLTS report put the job openings at approximately 5.5 million, and today’s data might help provide more insight into how much demand industry has for additional labor. Additionally, the President’s budget proposal is due out today, and media reports say it will contain additional military spending and put money toward a border wall.

In overseas developments, European and Asian stocks climbed early Thursday, seemingly getting some help from a much weaker dollar. The dollar fell against other currencies probably due in part to the Fed’s less-than-hawkish language. The euro also appeared to be buoyed by the Dutch election, which gave Prime Minister Mark Rutte a victory over far-right rival Geert Wilders, CNBC reported. Additionally, the Bank of England kept interest rates unchanged.

From a technical standpoint, the 2400 mark, reached back on March 1, remains resistance for the S&P 500 Index (SPX). We’ll see today if the SPX can again challenge that record.

Big Data Week Continues

It’s already been a pretty busy week, with inflation and retail sales data, the Fed meeting, and housing starts. But it’s not over yet, as Friday brings another string of economic numbers including February industrial production, February leading indicators, and the first read on March consumer sentiment from the University of Michigan. Arguably the biggest of these to watch is industrial production, which analysts expect to rise 0.2% in February following a 0.3% contraction in January, according to Briefing.com. This number has fallen in four of the last six months, a somewhat surprising track record considering the optimism so prevalent since the election. However, last month’s report saw most of the decline coming from a drop in utilities output, perhaps reflecting warmer than normal winter weather, Briefing.com said. Manufacturing and mining indicators both rose in January. The month of February was also warm across much of the country, so keep an eye on utilities to see if possible weakness there once again distracts from potential solid growth elsewhere.

GDP, Where Art Thou?

Despite the good cheer on Wall Street and rising rates, keep in mind that economic growth — as measured by gross domestic product (GDP) — doesn’t appear to be picking up this quarter, at least according to some prognostications. The Atlanta Fed’s GDPNow forecast for Q1 GDP growth ticked down to 0.9% Wednesday from the previous 1.2% estimate. That’s below many analysts’ expectations, but even many of the more bullish analysts only see about 2% growth at best. The GDPNow web site said the estimate went down based on projections for lower real consumer spending growth.

Nothing Goes Straight Up

Though it seems like the stock market has been rallying forever, remember that just over a year ago, things looked pretty bleak. And in almost every year on record, stocks have at some point have been lower than where they started. That isn’t to say this year will follow that rule or be an exception; none of us has a crystal ball that forecasts the future. But with stocks rising back toward recent all-time highs and the Fed now in an interest rate hiking cycle, it’s more important than ever to stay diversified and not go “all in” to the stock market. Fixed income investments tend to fall when interest rates rise, but having a portion of funds in fixed income continues to make sense from a portfolio balancing standpoint, and many investors find they can remain on target to reach goals without pressing the accelerator all the way down.