Stocks and pretty much every other asset class was on the move on Tuesday as the Federal Reserve started its two-day policy meeting. Wednesday is the big day, of course, featuring a policy announcement, press conference from Chairman Janet Yellen and the release of the Summary of Economic Projections — or “dot plot” — showing the Fed’s predicted path of interest rates.
In the end, the Dow Jones Industrial Average gained 0.6%, the S&P 500 gained 0.6%, the Nasdaq Composite gained 0.5%, and the Russell 2000 gained 0.7%. Treasury bonds firmed up, the dollar gained against the euro, and West Texas Intermediate crude oil gained 0.8% to close just below the $60 a barrel level.
Caution seemed to reign, however, as consumer staples stocks led the way with a 1.1% gain. Volatility also was fairly well bid vs. the gains in stocks, a sign of lingering nervousness. Technically, breadth continues to deteriorate — a sign of vulnerability as stocks remain mired in a trading range near Dow 18,000 going back to December as shown in the chart above.
As you probably already know, tomorrow is kind of a big deal.
The Fed will be actively considering interest rate hikes for the first time since 2006. The debate will center on whether or not to continue with the 0% emergency interest-rate policy that has been in place since 2008. The decision is complicated by uneven U.S. GDP growth, mixed inflation messages, good job growth but poor wage gains, the drag from a strong dollar and the knowledge that investors could react harshly to a rate hike as stock valuations remain “stretched” according to Yellen.
A surprise rate hike is likely off the table, but watch for any revisions to the dot plot, with Wall Street currently looking for the continuation of a two-rate-hike forecast for 2015. A drop to a one-and-done rate hike forecast would be bullish, as a similar downward revision was after the March policy meeting.
Alternatively, sticking to the two-hike forecast along with acknowledgement of the rebound in the flow of economic data — visualized in the chart above of the Citigroup Economic Surprise Index — could be considered bearish for stocks since it would all but ensure the Fed will hike rates for the first time in nine years in September or possibly in July.
Greece remained in the headlines as well heading into Thursday’s Eurogroup finance minister summit, seen as the last best chance of finding a new funding deal to help the country make a bundled payment worth $1.8 billion to the International Monetary Fund at the end of the week. Athens seems to be digging in, with the hard leftists in the government clamoring for a debt default and the Greek finance minister saying no new proposals will be offered on Thursday.
For now, I continue to recommend caution via plays like the ProShares Short MSCI Emerging Markets (ETF) (NYSEARCA:EUM), which is up 4.1% for Edge subscribers and benefits from the strengthening of the dollar associated with the approach of rate liftoff.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers. Clink the links above to sign up.
