The “washing machine” market persisted last week, as stocks sloshed back and forth on interest rate and trade war fears. In fact, it seems to me the stock market wants to retest its February 8 intraday lows. Personally, I’m looking for this retest to occur in the first two weeks of March, prior to the March Federal Open Market Committee (FOMC) meeting on the 20th and 21st. So the recent market volatility will likely persist in the near term. However, in today’s blog, we’ll discuss what I see going forward for the stock market.
After a dovish FOMC statement on March 21, I expect the stock market to recover nicely and climb higher through the end of the first quarter. March is historically a seasonally strong month. There are two mains reasons for this seasonality: quarter-end window dressing and the 90-day realignment of smart Beta ETFs.
At the end of each quarter, institutional fund managers look to shore up their portfolios by selling their losing stocks during the quarter and buying the best performers. And every 90 days, we see a rebalancing of smart Beta and equally weighted ETFs. So I look for fundamentally superior stocks to benefit from persistent institutional buying pressure in the upcoming weeks.
In the meantime, Wall Street will be closely monitoring the upcoming FOMC meeting. Last week, new Federal Reserve Chair Jerome Powell made his first comments to Congress. Powell stated that the Fed will raise key interest rates in anticipation of inflation rising to the Fed’s 2% target. He’s expecting up to four key interest rate hikes this year. Previously, most of the Street was anticipating up to three rate hikes this year. So this forecast shocked investors. But I don’t think the Fed will raise key interest rates as much as Wall Street now fears.
First, inflation still remains well below the Fed’s 2% inflation target. Remember, the Fed’s favorite inflation indicator, the personal consumption expenditure (PCE) index, has remained below this threshold since 2011. The PCE did increased by 0.4% in January, but it is still running at a 1.7% annual pace in the past 12 months. Excluding food and energy, the core PCE rose only 0.2% in January and is running at a 1.5% pace in the past 12 months.
Another reason there’s some dispute on whether or not the Fed will raise key interest rates two to three more times this year after its March key interest rate increase: the yield curve. The Fed may not raise key interest rates as much as Wall Street anticipates, since the FOMC does not want to invert the yield curve. Remember, an inverted yield curve would be devastating to the banking industry that the Fed regulates.
In addition, the Fed likes to follow the tape, and market interest rates have moderated a bit. So I don’t look for the Fed to fight market rates. Overall, some of these anticipated interest rate hikes may not be forthcoming in 2018, and once the Street realizes this, it should help support a market recovery in late March.