Stocks Rally as Rate Hike Fears Dissipate

Now that the fears of the Federal Reserve’s interest hikes have been postponed, US stocks still face a tumultuous year. The Fed’s groundbreaking decision has led to stock rebounds, but many experts warn that the celebrations won’t last long. The central banks’ move to sit on the sidelines could have unforeseen consequences.

Even though banks around the world are hesitant to start rate hikes, investors still have plenty to worry about. Tumbling earnings, a controversial presidential race & rising valuations are already casting doubt about how long this recovery will last. In the face of all the criticism, the US labor market is thriving despite weakening retail sales. These harsh contrasts could force the Fed to raise rates in December.

Rate Hikes Have Been Pushed Back to December

rate hikes

Stocks made a brazen rally after the Fed decided to lay low.

“To add to stock holdings here would be betting on a lot of unknowns, and that can be painful in the long run,” said Tom Mangan, senior vice president of James Investment Research Inc. in Xenia, Ohio, which oversees about $6.5 billion. “I don’t see much of a rationale for stocks to continue to get more and more expensive.”

For now, the Federal Reserve has committed to holding policy rates steady. Janet Yellen’s Fed made headlines when they announced that they would refrain from hiking up interests rates. Even though policy makers admitted that the case for higher rates had strengthened, they decided hold off until December. Three officials voted for rate hikes, up one from last meeting. This is showcasing a growing sentiment within the Feds to start making raises. But for now, the Fed has promised to sit on the side lines & see how things play out. This bold decision was mirrored by the Bank of Japan, who set the example for other central banks.

Following this historic move the S&P 500 Index surged, while US equities continued to flounder. The S&P 500 soared by 6.6%, officially erasing the worst start to a year on record. This put stocks on a 5 month rally. Despite this flash recovery, economic growth fell short of forecasts at 1.5%. US equities joined the decline & are poised to make their first back to back monthly decline.

rate hikes

For now, the Federal Reserve will let the market cool down.

“Will the markets race up to a new high again? We certainly could see that. I don’t see a lot of downside here, unless there’s a real scare about what happens in the election,” said Timothy Ghriskey, who helps manage $1.5 billion as chief investment officer at Solaris Asset Management LLC in New York. “The Fed always says they’re not political, but I think in this case maybe they are, until they see what happens.”

Even though these new developments are causing financial turbulence, the market is still on par with expectations. The Fed’s willingness to let the market settle is leaving the S&P 500 at the same level seen in September 8th. This translates to relative stability since Eric Rosengren sparked the biggest selloff since Brexit. Stocks are also in line with forecasts by the Wall Street Journal’s equity strategists. They placed the equity benchmark at 2,156 by the end of 2016.

Even though everything is running according to predictions, there is still plenty of room for surprises. The tightening of futures markets & the likelihood of rate hikes in December are paving the way for a tumultuous year. Only time will tell if the current stock rallies can generate enough momentum to preserve sputtering US equities.

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