The SPDR S&P 500 ETF Trust SPY has rallied 2.4% in the last two days after the Federal reserve said on Wednesday that it could begin tapering its $128 billion in monthly asset purchases “soon.”
The Fed’s commentary suggests the U.S. economy is now on strong enough footing to stand on its own. Yet the market may lose one of its biggest growth drivers, and the elevated inflation could even have investors talking about potential interest rate hikes sooner than previously expected.
Fed Feedback: Anu Gaggar, global investment strategist for Commonwealth Financial Network, said Thursday the Fed’s willingness to taper is a good sign for the economy.
Related Link: Fed Maintains Interest Rates, Suggests Tapering Of $120B In Monthly Asset Purchases Could Happen 'Soon'
“A hawkish Fed was surprisingly welcomed by equity markets as it was seen as a confirmation of continued strength and “substantial progress” made by the economy in recovering from the COVID shock. While we are far from the end of QE and near-zero rates, the tide seems to be beginning to change,” Gaggar said.
DataTrek Research co-founder Nicholas Colas said investors don’t need to worry about interest rate hikes killing the bull market anytime soon.
“The U.S. economy continues to improve, and the Fed will likely raise rates next year. History shows that the first rate hike rarely kills equity market rallies, so on its own this is not worrisome,” Colas said.
Expect More Volatility: Tom Essaye, founder of Sevens Report Research, said investors should expect the stock market to remain volatile for now given the number of additional catalysts ahead in the near future.
“Bottom line, equity market volatility has reared its head this week and while no clear bias or momentum direction has emerged in the market since Monday’s close, whichever way the market breaks it is likely to generate some momentum, so keeping an eye on the aforementioned support and resistance levels should be helpful as we navigate our way through this all-important Fed week,” Essaye said.
Brad McMillan, chief investment officer for Commonwealth Financial Network, said the debt ceiling debate in Washington could be the next potential market-moving catalyst.
“But as with the economy, once a deal is finally reached, that damage will pass fairly quickly. Again, this is what has happened in past confrontations, with short-term volatility fading once a deal has been reached,” McMillan said.
Benzinga’s Take: Tapering, political drama and even potential rate hikes could certainly create temporary selling pressure in the stock market. But investors can’t overlook the trillions of dollars of stimulus that has been pumped into the U.S. economy in the last two years and the massive impact that stimulus will continue to have on U.S. corporate earnings for years to come.
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