The Market Loves the Goldilocks Fed

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,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “The Market Loves the Goldilocks Fed”

  1. HI Brad,
    As the late Larry Edelson said, the world has OVER FOUR HUNDRED TRILLION DOLLARS OF PRIVATE PERSONAL, CORPORATE AND SOVEREIGN DEBT!!!! Created by global banking elites, worldwide, which has, in turn, created the LARGEST MOST MASSIVE BOND AND BY EXTENSION DEBT BUBBLE the world has ever seen. Now, that bubble is going to be burst by raising interest rates!!! Why, the party line is that the economy is improving. That is really nonsense as we have had the worst economic recovery post WW2 from the great recession. Just look at the USA labor participation rate among many many many other economic parameters. Most likely the real reason is to bring down the capital markets. This has been done for centuries, just read all the stories about the Rothschild s etc..etc..It would not be out of the elites to be doing this to put pressure on the Trump Administration. Basically, it goes like this: boost interest rates, cause the capital markets to correct severely, thus “creating a crisis” and then blame Trump in order to eventually get him out of office later on. In any event, this is a VERY ominous sign, and we did not get into the demographic problems facing the world. Massive Bond Market Bubble plus Equities at ALL TIME HIGHS plus rising interest rates coming off all time lows/negative interest rates worldwide EQUALS MAJOR CAPITAL MARKET CORRECTION!!!!!!See how well the Japanese economy has been doing since the 1989 Nikkei peak??? See how well Greece is doing?? How about Italy???? How about Puerto Rico??? or Illinois??? or New Jersey???? What how this unfolds!!!!

  2. Well done and helpful. Thanks, Brad. Now we decide what to believe about this market and its future…sigh! A reNEWed culture and SOP are being set, so who knows? After 100 years of degradation, some relief seems possible. Maybe Congress, sans Pelosi, et. al., will be influenced and actually do something FOR the nation. Given that most are “1”s, many are “2”s, and Pelosi is decidedly a “3”. (The number refers to the number of lobotomies which have been performed upon the individual(s) to which the number is assigned.)

  3. What if? What if through the magic of common sense and hyper communication we trended towards what things should be. Modest interest rates, clean food, super efficient housing and transportation, real money, nationalism, clean water, and all of that. Its sounds ridiculous but I keep seeing the trend and when I realized that I had to do my part, well it gets more rational every day. Think about it. What should you really be doing?

  4. same old b.s. rate hikes indeed! should have been more like 2% but that would put a rhino in the china shop, but who cares? it’ll all happen sooner than later anyway.

    and i like ben’s advice : bulk up on silver because its malleable, ductile, easily traded and scarce. being useful(more than) in industry it disappears rather quickly and is irrecoverable after that. so forget the game playing with the ‘big boys’ (trump included) and make up your own game you look after yourself in this scary world. its scary because trump’s military advisers( and mr. mccain) are wanting to escalate the war in afghanistan by sending more (30,000 american troops) to ‘combat’ the taliban. more b.s. the taliban are getting stronger by the day and more women and kids are being killed by ‘friendly’ american bombing, sickening. those advisers have obviously not heard of albert einstein : lunacy, trying to get a different result by doing the same thing over and over again. this ‘war’ has cost america over US$ one trillion and many thousands of your soldiers. but the drug (opium) trade has increased enormously since 2002. ah maybe there is a connection here. just ask the c.i.a. meanwhile maybe mr. mccain can join the military, fast track himself to major or similar and lead the charge against those awful taliban. i am afraid that u.s.a. is imploding from within. i hope that oz doesn’t go the same way as we are ‘supporting’ u.s.a. in afghanistan and everywhere else. i am afraid that my oz nation is just one big ‘suck up’ to american.

  5. The markets seem to be running wild on a false hope that everything is now hunky/dory, but Congress is ignoring the debt limit, and the looming crisis in retirement benefits, among other real problems. They are caught up in things like Trumpcare and the Mexican Iron Curtain which may get votes for members. They don’t see the locomotive coming down the track.

  6. US $ dropped and precious metals went higher. Gold and silver will mover higher in coming months.

  7. History repeats itself. Pre depression rate hikes triggered the beginning of the great slide

  8. Need to cash in IRA’s and 401’s and buy dividend paying, Whole Life Insurance. Also buy all the physical silver you can store. Couple more hikes won’t be able to pay interest on the DEBT.

  9. Market is not going to get what it wants in the time-frames expected. Democrats will fight every initiative and media will not give the President any benefit of the doubt.

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