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:
- There is little technical deterioration in the market. The S&P 500 is approaching its historic high of 2,400, which it hit on March 1, the day after Trump's well-received speech before Congress. Lowry, the world's oldest technical analysis service, told their clients yesterday that "the vast majority of our indicators continue to suggest a healthy intermediate term uptrend." Buying interest remains in an uptrend and selling pressure remains in a downtrend.
- Sentiment remains bullish. The Business Roundtable CEO Economic Index saw its biggest increase in seven years in its first-quarter survey. The NAHB Housing Market Index jumped to 71 in March, up from 65 in February and the highest level since June 2005
- The retail investor is getting involved. Flows are more positive than they have been in years. ETF inflows this year are approaching $100 billion, and while it is common to note that the average investor often gets in late in the rally that does not mean the rally cannot continue.
This morning, I highlighted the three most important near-term risks to the market:
- The Federal Reserve acting in an overly hawkish manner, a concern that is now mostly alleviated.
- European elections, particularly in the Netherlands (today) and France (ends May 7th), which still remains a wild card.
- A notable slowing or derailing of the Trump agenda of tax cuts, a reduction in regulations, and infrastructure spending.
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.