Friday's Market Minute: Is The Market Correction Finally Over?

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The Fed on Wednesday raised its main interest rate by a quarter percentage point, in line with market expectations. Asset markets treated the FOMC statement and projections as hawkish on release, but reacted more positively as the press conference progressed.

Stocks followed up yesterday with another close higher, coming off a correction in the broader market and bear market among growth names. It appears the Fed struck a vote of confidence from the equity market that the FOMC won't overreact and slam the brakes too hard.

During corrections and bear markets, rallies are precipitous. Thus far, equities have interpreted the Fed’s statement and guidance as if there were an anticipated sharp slowdown in growth which would force the Fed to halt rate hikes.

Year to date, the equity market has perceived an economy in crisis, which has produced the sort of wild price swings often associated with recessions and bear markets across all major indices. This is not unusual, considering the Fed is now embarking on its current tightening cycle after extreme accommodative monetary measures deployed during the heart of the pandemic.

There never has been a so-called soft landing when it comes to a rate tightening cycle. The Treasury market doesn't look too convinced that an eventual soft landing is on the cards, as long-term yields remain depressed relative to inflation.

Long rates are a proxy for economic growth, which is poised to slow as the labor market is tight and productivity growth can only be stretched so far to keep GDP trends uninterrupted. Despite further flattening of the yield curve, inversion has yet to occur.

An inverted 2s-10s curve is generally considered a warning of an impending recession, so equity investors are still in the clear for now. All else equal, escalation of conflict by Russia, higher commodity prices, and rising COVID cases in China might keep equity volatility elevated, but stocks appear due for a sustained and meaningful recovery in the second and third quarters of the year.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.