As mar­ket ral­lies back, in­vestors turn eyes to the Fed

The Pak Banker - - MARKETS/SPORTS -

In­vestors who have pushed the US stock mar­ket higher over the past month will be tak­ing their cues about the pace of fu­ture in­ter­e­strate hikes next week from the Fed­eral Re­serve. Re­cent eco­nomic data has re­lieved con­cerns that the United States might be head­ing for a re­ces­sion and helped fuel the bench­mark S&P 500 in­dex's .SPX 11 per­cent re­cov­ery since mid-Fe­bru­ary.

But ev­i­dence of im­prov­ing do­mes­tic con­di­tions could also prod the Fed to speed up planned rate in­creases and thereby po­ten­tially dampen en­thu­si­asm for stocks.

In its state­ment fol­low­ing a two-day pol­icy meet­ing on Wed­nes­day, the cen­tral bank is widely ex­pected to hold its key rate steady af­ter hik­ing it in De­cem­ber for the first time in nearly a decade, while econ­o­mists polled by Reuters ex­pect an in­crease by the end of June and one more be­fore the year is out.

"It's go­ing to be a ses­sion with pars­ing in­di­vid­ual words in the state­ment about how likely the mar­ket be­lieves the Fed is to move, how quickly they are go­ing to move for the next hike," said Wal­ter Todd, chief in­vest­ment of­fi­cer at Green­wood Cap­i­tal As­so­ciates in Green­wood, South Carolina.

Should the Fed give any hints it will get more ag­gres­sive on rate hikes than the mar­ket projects, it could blunt the mo­men­tum for stocks. While in­vestors may be bet­ting on one in­crease for the rest of the year, Todd said, "the Fed in its last state­ment made it pretty clear that they want to go more than that."

Traders are dis­count­ing any change in rates when the Fed meets next week, ac­cord­ing to the CME Group FedWatch tool.

"Ev­ery­body has planned ac­cord­ingly for no ac­tion, so if there is an ac­tion I think that would have a neg­a­tive ef­fect on the mar­ket," said Jonathan Cor­pina, se­nior man­ag­ing part­ner for Merid­ian Equity Part­ners in New York.

The Fed has kept in­ter­est rates at near zero for vir­tu­ally all of the cur­rent bull mar­ket for stocks, which marked an­niver­sary on Wed­nes­day.

More re­cently, the out­per­for­mance of con­sumer dis­cre­tionary stocks over the con­sumer sta­ples sec­tor over the past month is ev­i­dence of in­vestors bet­ting on the Fed keep­ing rates un­changed for now, ac­cord­ing to S&P Cap­i­tal IQ.

"The equity 'risk' switch has been in the 'on' po­si­tion for the past few weeks," S&P Cap­i­tal IQ said in a re­port.

With the S&P track­ing to its fourth straight pos­i­tive week, the in­dex is now off only about 1.5 per­cent for the year. So far in March, ev­ery S&P sec­tor has posted gains, led by en­ergy shares. In re­cent months, stocks gen­er­ally have cor­re­lated tightly with fluc­tu­a­tions in de­pressed oil prices, so the run of U.S. crude CLc1 into pos­i­tive ter­ri­tory for 2016 and back to around $40 a bar­rel has been a key fac­tor in the stock mar­ket's bounce.

The sta­bi­liz­ing of other com­mod­ity mar­kets and eas­ing of con­cerns over China's

its seven-year econ­omy has also buoyed stocks along with bet­ter-than-ex­pected U.S. data.

Next week will bring ad­di­tional read­ings on the health of the U.S. econ­omy, in­clud­ing re­ports on retail sales, hous­ing and in­dus­trial pro­duc­tion. "The stock mar­ket ral­lied be­cause we got ev­i­dence that we're not re­cess­ing and we were pric­ing in a re­ces­sion," said Jim Paulsen, chief in­vest­ment of­fi­cer at Wells Cap­i­tal Man­age­ment in Min­neapo­lis.

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