You know the story of Goldilocks and the three bears.
When Goldilocks stumbled upon the house in the forest, she walked in and found three bowls of porridge. The first bowl was too hot, and the second was too cold. But the third bowl, well, that was just right.
Today’s decision by the Federal Reserve on the fate of interest rates is like Goldilocks’ just-right bowl of porridge.
As expected, the Fed raised the benchmark Federal Funds rate by 25 basis points. But the rate hike alone wasn’t the Goldilocks number.
The "just right" number came from the so-called Fed "dots." These indicate where members of the central bank think interest rates will be at the end of this year, year-end 2018 and year-end 2019.
Those dots show that the Fed plans to hike rates two more times this year, for a total of three hikes (including today’s move). Moreover, in 2018 the Fed dots also show three hikes.
This consistency of this pace of likely rate hikes over the next couple of years is the Goldilocks showing the bulls had hoped for. As a result, the Dow surged more than 100 points to close just under the 21,000 mark.
While the equity bulls took their cue from Yellen & Co. and pushed stocks higher, there was a reaction in the U.S. dollar and gold that wasn’t generally anticipated.
The greenback fell sharply vs. rival foreign currencies, with the PowerShares U.S. Dollar Index Bullish Fund (UUP) falling to one-month lows.
Meanwhile gold, which has come under pressure since late-February on assumptions the Fed would indeed hike rates at today’s meeting, actually perked up after falling below the $1,200 mark earlier in the session.
The fall in the dollar and the rise in gold were largely relief rallies. That is, rallies that took place because the Fed wasn’t as aggressive as they might have been on the future pace of rate hikes.
Then there were bond yields, which you might expect to have risen given the Fed’s move today. Yet that’s not what happened.
The yield on the benchmark 10-year Treasury note fell to 2.508%, or more than a 3% decline from yesterday’s closing yield.
Here again, this is likely due to the Fed delivering its measured message today on the pace of interest rates going forward.
One takeaway here is that Wall Street got its Goldilocks bowl of porridge from the Fed. Yet, the markets still seem confused.
With rates going up, you would expect there to be a rise in the dollar, a decline in gold, a jump in bond yields … and even a pullback in equities.
Yet this is the market circa 2017. Now, stocks keep surging despite what some say are record-high valuations, and despite rising interest rates.
That leaves us to conclude that this market remains all about the lofty pro-growth policy expectations of the Trump administration.
Yes, the Fed is hiking rates because the economy, inflation and the job market have improved. Clearly, they feel that the economy can handle another quarter-point rate hike.
But stocks aren’t trading at all-time highs because of that.
Instead, stocks are surging on hopes that the president and Congress can get healthcare reform, continued regulatory reform and a corporate tax cut enacted.
That is the hope that keeps the bullish fuel burning. And now that the unknown of the Fed is, well, known, look for Wall Street’s collective eyes to turn to Washington.
What do you think about the Fed’s decision to hike rates? Is it a good sign for the economy, or are stocks reacting too bullishly? I want to know what you think. Leave me a comment on our website or send me an e-mail.
Stocks finally exhaled after the FOMC announcement, after holding their collective breath for the past several days. The Dow quickly made a triple-digit surge, and ended Wednesday 0.5% higher.
• Oil broke its seven-session losing streak. WTI gained 2.4% after U.S. inventories came in lower and the IEA suggested a crude deficit is coming this year thanks to OPEC’s production cuts.
• The Energy Select Sector SPDR (XLE) went from yesterday’s biggest losing sector to today’s biggest gainer, rising 2.2%.
• Gold grazes $1,200. The yellow metal dipped below that level intraday and managed to close above that mark thanks to U.S. dollar weakness.
• Miners soared post-Fed, with the VanEck Vectors Gold Miners ETF (GDX) ending Wednesday 7.7% higher.
• Hack attack: Several news and celebrity Twitter (TWTR) accounts tweeted a swastika and a message in Turkish today. Hackers specifically called out Germany and the Netherlands over their dealings with the country. The accounts have been restored, but TWTR fell 1.9%.
Good luck and happy investing,
Uncommon Wisdom Daily