Stocks have rallied modestly and bond yields have fallen after the Fed statement for a simple reason: It was less hawkish than traders feared.
It mostly revolved around a single word, "gradual," remaining in this sentence: "The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."
For the Street, "gradual" has come to mean three rates hikes this year. The Fed indicated there would be two more hikes in 2017, a forecast that is right in line. It also indicated there will be three more in 2018.
The Fed was not aggressive in its economic forecasting: GDP for 2017 remained at 2.1 percent, though it raised the 2018 estimate 0.1 percentage point to 2.1 percent, and held unchanged at 1.9 percent for 2019.
Looking at the action today, you have to continue to believe that the rally will continue, despite a few small cracks, for several reasons:
This morning, I highlighted the three most important near-term risks to the market:
As long as the market continues to believe that the Trump agenda can get passed, the markets will likely continue to hold. That is the key.
Could you argue that even if the Trump agenda goes through, the market is already fairly priced and has discounted the Trump agenda?
Sure you could, but I don't think that is the likely case. We still seem to have room for another burst after the tax cuts are approved. How much more? No idea, but certainly we have a shot at 2,500 in the S&P 500.