The Federal Reserve, as expected, raised interest rates by 0.25% on Wednesday for the second time in three months — a dramatic quickening of the prior pace of just two rate hikes in the last 10 years, and a boost to the S&P 500 and other major stock indices.
It was a “hawkish hike” with future rate hike expectations drifting higher as well. The Fed continues to pencil in another two rate hikes for the rest of the year. And it now expects long-term interest rates to reach 3% by the end of 2019, a slight increase from its last forecast back in December.
Yet markets responded in the opposite way you would expect, suggesting that markets were bracing for an even more aggressive rate hike forecast. Stocks rose. Bonds rose. Precious metals rose. And the dollar weakened.
This is surprising, especially in light of the fact that Atlanta Fed lowered its Q1 GDP growth estimate to just 0.9% heading into the day’s decision — suggesting the economy could be suffering a bout of weakness.
In the end, the Dow Jones Industrial Average gained 0.5%, the S&P 500 gained 0.8%, the Nasdaq Composite gained 0.7%, and the Russell 2000 gained 1.5%. Treasury bonds rallied, the dollar fell 1%, gold rallied 1% after the close, and oil gained 2.4% to recover from its recent selloff.
Movers and Shakers
Energy stocks led the way with a 2.1% gain, followed by rate-sensitive REITs, up 1.9%.
Financials were the laggards, down 0.1%, which is also surprising since the sector has been leading the charge since Election Day on hopes higher long-term interest rates would boost net interest margins and thus profitability. As a result, Goldman Sachs Group Inc (NYSE:GS) fell for its eighth consecutive session — the longest losing streak for the Wall Street icon since May 2008, in the heart of the financial crisis.
Harley-Davidson Inc (NYSE:HOG) rose 4.7% after being upgraded to neutral by analysts at Longbow Research noting channel checks point to stronger-than-expected sell through. Occidental Petroleum Corporation (NYSE:OXY) gained 3.2% after being upgraded to buy from neutral by Bank of America Merrill Lynch.