Spooked by recent financial market turmoil and global economic uncertainties, the Federal Reserve on Wednesday decided to punt the football: holding off on any new interest rate hikes, cutting its “dot plot” forecast to two rate hikes this year (down from four) and cutting its economic forecast (2016 GDP at 2.2% vs. 2.4% before). The odds of a June rate hike are now back below 50%, with better-than-even odds not seen until September.
And while this raises worries that policymakers are falling behind the curve on inflation amid a pickup in core prices and a tightening labor market, it was what Wall Street obviously wanted to hear.
In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 gained 0.6%, the Nasdaq Composite finished off 0.8% higher and the Russell 2000 ended the day with a 0.7% gain. Elsewhere, Treasury bonds rallied, the dollar weakened, gold gained 2.5% and crude oil surged 6% to close at $38.51 a barrel. Breadth was heavily positive, with advancing issues outpacing decliners by 4.2 to 1 on the New York Stock Exchange.
Materials stocks led the way thanks to the rally in precious metals, rising 1.7% as a group. Energy gained 1.6% thanks not only to the Fed but also to reports that the OPEC/non-OPEC production freeze meeting scheduled for April 17 in Doha will go ahead with or without Iran — who have been demanding a return to its pre-sanctions output level. Healthcare was the laggard, losing 0.3% on weakness in biotech names.
But back to the Fed.
It should be noted that a “no hike” decision from the Fed back in January gave way to fresh market weakness after the Bank of Japan cut rates into negative territory. So a continuation of the gains is far from guaranteed. Moreover, weakness in small-cap and financial stocks is a concern.
In fact, as shown below, the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) have triggered a sell signal today — based on the parabolic stop-and-reverse indicator — for the first time since early February, as a recent downtrend from the March 7 highs continues.
And finally, should inflation continue to heat up, the Fed will not be able to simply back away from further rate hikes whenever the stock market gets bumpy. Core consumer price inflation increased at a higher-than-expected 0.3% monthly rate in February pushing the annual rate to 2.3% for the best result since May 2012.
Economic data has been coming in stronger as well, with single-family housing starts increasing to their highest level since late 2007.
As a result, I have recommended by Edge subscribers move to cash booking profits in positions like Barrick Gold Corporation (USA) (NYSE:ABX) — which gained nearly 90% since added in November — while Edge Pro subscribers are focusing on short-side put option plays against weakening big-tech stocks like Amazon.com, Inc. (NASDAQ:AMZN).
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