Markets rallied for a full trading session Tuesday — as opposed to Monday, when gains petered out (or failed to notably materialize, in the Nasdaq’s case) as the day moved along. The Dow closed +599 points, +1.82%, the S&P 500 performed even better, +2.14%, and the recently beleaguered Nasdaq rose 367 points on the day, +2.92%. The small-cap Russell 2000 took up the rear position, but still gained +1.40%.
With markets in correction territory from their all-time highs — all of which have come in just the past four months — it felt like a good time to stage a relief rally, at least until the Fed’s move re-sets the table for what we can expect going forward. Companies like
The Walt Disney Co.
DIS
and
Microsoft
MSFT
felt plenty of that relief today, both having gained roughly 4% on the day to lead the Dow. Both stocks are -14% year to date.
Stocks closed at or near session highs less than a full day removed from the long-awaited Fed policy decision, where it is universally understood a 25 basis-point hike is in the cards. It will be the first crank of the wheel since late 2018, and the first notch off near-zero (0.00-0.25%) the Fed established as the pandemic threatened to bear down on the U.S. economy. Even a 50-point hike, while considered far less likely, would be less of a surprise than no hike at all.
We’re at near 8% growth in the latest CPI figures, year over year, which does not yet account for the economic albatross brought about by Russia’s invasion of Ukraine and the subsequent moves to cut Russia out of the global marketplace. So we can expect this inflation metric to only go higher — and it’s already on a much steeper sustained incline than anything we’ve seen since the early 80s.
There is also the question of whether the yield curve between the 2-year bond and the 10-year will continue to flatten or even invert, which is a common warning sign toward a coming recession. For this reason, most analysts take Fed Chair Jay Powell at his word that the hike will be just a quarter-point instead of a half. The Fed is focused on threading the needle between curbing inflation while keeping growth intact. This is what we’ve been waiting for for six weeks.
Beyond the rate hike, the question of draining the $9 trillion on the Fed’s balance sheet has also been promised as a major issue the Fed will begin to tackle. Treasuries and mortgage-backed securities will be allowed to expire as a yet-undetermined rate. A hawkish Fed is on the way — the question is: how hawkish?
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