Fundamentals trumped geopolitical concerns today–and the stock market was better for it.
REUTERS The S&P 500 rose 0.5% to 1,983.53, while the Dow Jones Industrial Average gained 0.4% to 17.113.54. The Nasdaq Composite advanced 0.7% to 4,456.02 and even the small-company Russell 2000 climbed 0.8% to 1,156.15.
Israel pressed on with its invasion of Gaza continued, while tensions in Ukraine remained high. But strong housing data combined with a lukewarm inflation reading that suggested no imminent tightening soothed investors’ nerves. Still, Wells Capital Management’s Jim Paulsen suspects that the Fed is closer to a rate hike than many investors expect:
Currently, four major economic indicators suggest a Fed tightening may be much closer at hand than most now anticipate. The yield curve is within 25 to 50 basis points of being steep enough to intensify pressure for Fed tightening. The U.S. resource markets (labor unemployment and capacity utilization) have just reached a level which has prompted imminent tightening six out of six times in the last 50 years! Nonsupervisory wage inflation has been accelerating for the last 20 months and based on history the Fed is already far behind the wage curve. Finally, so far this year, loan growth has spurted to its quickest growth rate of the recovery and the pace of loan growth now suggests a rate hike is nearing.
Our best guess for the first hike in the funds rate is in the first quarter of next year. However, the Fed's Boss is already boisterous in calling for an increase in interest rates and we would not be surprised if the financial markets are shocked by a much quicker time table than almost anyone currently anticipates.
The folks at Capital Economics aren’t so sure the first rate hike will be that big a deal:
The received wisdom is that Fed tightening is bad news for many assets. But in the last three cycles, this was not always the case. Next time around, our view is that the US stock market will shrug off more restrictive monetary policy, while equities elsewhere in the world will generally fare even better. However, we think a big loser will be Treasuries – we don't expect another bond market "conundrum". We doubt Gilts, Bunds and even JGBs will be completely immune. But we do expect them to have a less rough ride, since monetary policy is either likely to be tightened less rapidly (the UK), or even loosened further first (the euro-zone and Japan).
Who’s betting they’re right?
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