Why the stock market is not ‘smoked’, even though the Federal Reserve signals that it is ready to raise interest rates

A brief sway aside, the U.S. stock market Federal Reserve Chairman Jerome Powell’s decision to fully unleash the anti-inflationary side of his monetary policy persona.

That may come as a surprise to some investors as government interest rates rise and money market participants price in an aggressive round of benchmark rate hikes after Powell on Monday made it clear the Fed is ready to deliver 50 basis point rate hikes, something it has not done. done since 2000, at forthcoming political meetings if necessary to combat inflation.

“The stock rally is of clear interest and we are looking into [Nasdaq-100]
that there is solid support below 14,000 ″, even though the US 10-year government interest rate TMUBMUSD10Y,
continues to rise well above 2% and threatens to break its decades-long downward trend, said Chris Weston, head of research at Australia-based Pepperstone, in a note to customers.

“We should consider why stocks were not smoked,” Weston said.

For its part, Weston argued that the fact that the Fed “brings the big guns forward in May and uses forward-looking guidance to set the stage ahead of this may be welcomed by the stock market – they have weighed the prospects and feel credible. “The Fed is a strong Fed, and higher interest rates are better than anchored inflation.”

The Nasdaq-100 rose 1.5%, while the technology-heavy Nasdaq Composite COMP,
rose 1.6 pct. Technology and growth stocks are seen as the most sensitive to rising government interest rates, reducing the present value of their future earnings and cash flows, and which are used to justify their high stock prices. However, the Nasdaq already fell into a bear market earlier this month, falling more than 20% from its record closing in November.

Equities, however, have risen sharply since the Fed last week started the rate hike cycle with a 25 basis point rise to the Fed funds rate, signaling that there is not yet a significant monetary tightening. Equity indices are now also trading above levels ahead of Russia’s invasion of Ukraine on 24 February.

Dow Jones Industrial Average DJIA,
rose about 205 points, or 0.6% on Tuesday. S&P 500 SPX,
rose 0.8%, with the large-cap index trading at its highest level since 11 February.

It is important to remember that the S&P 500 index had retreated almost 15% through the low of 24 February, which means that “a lot of bad news was priced in”, and which means that the risk / return outlook is improved since the beginning of 2022. said Tom Lee, founder of Fundstrat Global Advisors. in a note.

However, the current market environment is one where investors should not try to “be a hero” or make a “big call”, he said, with markets likely to remain volatile.

Pepperstones Weston noted that the war between Russia and Ukraine has served to raise inflation concerns as the prices of crude oil and other commodities have risen in volatile trade. Though translated into periods of hard sledding for stocks, it appears funds are “well secured, there are tons of cash on the sidelines and rotation is real,” he said, as traders move into energy stocks while crude oil rising and increasing defensive positioning in sectors such as utilities.

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