In the face of rising inflation and a resurging economy, the Federal Open Market Committee (FOMC) on Wednesday said that the Federal Reserve will start this month to reduce, or “taper,” its recent stimulus program of bond-buying, with a plan to end the program fully by June.
The FOMC also said in its dovish statement that it would keep its target range for interest rates at 0.0% to 0.25% for the foreseeable future until the committee determines maximum employment following layoffs related to the pandemic returns and inflation is on track to “moderately exceed 2% for some time.”
The committee decided to start reducing its monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities, which is much less than what many economists were expecting.
That means, beginning later this month, the Fed will buy at least $70 billion per month of Treasury securities and at least $35 billion per month of mortgage-backed securities. Then starting in December, the Fed will buy at least $60 billion per month of Treasury securities and at least $30 billion per month of mortgage-backed securities.
The Fed will likely continue to reduce its purchases at a similar pace through June but may change its schedule depending on the economic outlook.
Fed officials also admitted that inflation has been on the rise, though the committee still considers increasing prices as mostly a transitory phenomenon that doesn’t yet warrant raising rates.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the Fed said in its statement.
However, Federal Reserve Chairman Jerome Powell noted in a press conference after the meeting that: “Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate.”
Stocks climbed on the news, with the Dow rising to a new record close over 36,000 and both the S&P 500 and the NASDAQ hitting new record highs at Wednesday’s close as well.
I should add that the Fed is not alone in staying the course on keeping interest rates steady, as the Bank of England made the same decision this morning. The bank will keep its rates at 0.1%, even as it expects inflation will increase to about 5% by the spring of 2022.
Overall, it is very apparent to me that Fed Chairman Powell wants his job renewed by President Biden and will strive to not rock the boat by keeping monetary policy super accommodative.
Benefitting from an Early “January Effect”
So, what do the latest Fed pronouncements mean for the stock market?
I’d say nothing bad for fundamentally superior smaller-cap growth stocks.
Under the surface of the market, we’re in the midst of a very strong “January effect.” We experienced a bit of it in October and now it’s accelerating. That’s when yearend pension funding and annual gift-giving tend to create forced buying pressure under smaller-cap stocks, which are more sensitive to volume. As a result, they tend to flourish between November and May.
You can see this playing out in the Russell 2000, which hit a new 52-week high on Monday, Tuesday and Wednesday and is up more than 7% over the past month.
And even though some mega-cap stocks like Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) recently missed analysts’ earnings forecasts, as I wrote about last week, they’ve rebounded fairly well in recent days.
More importantly, money isn’t leaving the market. Instead, it’s flowing into fundamentally superior smaller-cap stocks, which is a very good sign.
Normally this is a time of year when we typically lose breadth and power, but I like the tone of the market.
Now, I wouldn’t be surprised if recent highs reached in the NASDAQ and S&P 500 take a pause next week, but that’s good as well. Pauses refresh the market.
In the meantime, the private sector is adding jobs at a blistering clip. ADP reported 571,000 new jobs were added in October, crushing the Dow Jones estimate for 395,000 new jobs. The Federal Reserve Bank of Atlanta is forecasting GDP growth of 8.2% in November after decelerating at an estimated rate of 2.7% in October.
The bottom line is that with a strong economy and a recovering jobs environment there’s not much to derail the stock market as we head into the seasonally strong time of year and continue through January.
And we can’t forget about the stunning third-quarter earnings season we’re experiencing right now. According to FactSet, the average earnings surprise in the S&P 500 so far is 10.3%, and the S&P 500 is on track to achieve 36.6% average earnings growth and 15.8% average sales growth.
I am pleased to say that my Accelerated Profits stocks are forecast to do significantly better than the S&P 500. They have superior forecasted sales of 37.8% and earnings growth of 294.9%, as well as a strong earnings surprise history of 71.4%.
And since my Accelerated Profits stocks have much stronger average sales and earnings growth than the overall stock market, I expect them to continue to emerge as market leaders.
Its latest earnings announcements were a stunner. The company reported double-digit earnings and sales growth from the year prior and beat Wall Street’s expectations for the top and bottom lines.
The stock has risen by triple digits this year and I expect its superior fundamentals will help keep shares trekking higher. I just released the name and ticker of this stock to my Accelerated Profits subscribers this afternoon, so you’re just in time to take advantage of my latest recommendation.
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Amazon.com Inc. (AMZN)