Why the stock market isn’t “smoking” even as the Federal Reserve signals it’s ready to raise interest rates

A brief wobble aside, the US stock market takes Federal Reserve Chairman Jerome Powell’s decision to fully unleash the inflation-fighting side of his monetary policy.

That may surprise some investors as Treasury yields soar and money market players price in an aggressive round of benchmark interest rate hikes after Powell made it clear on Monday that the Fed was ready to offer hikes. rate by 50 basis points, which it did not do. been doing since 2000, at upcoming policy meetings if needed to fight inflation.

“The rally in equities is of obvious interest, and we see in the [Nasdaq-100]
NDX,
+1.79%
that there is strong support below 14,000″ even though the 10-year US Treasury yield TMUBMUSD10Y,
2.377%
continues to climb well above 2% and threatens to break its decades-long downward trend, Chris Weston, head of research at Australia-based Pepperstone, said in a note to clients.

“We should ask ourselves why the stocks weren’t smoked,” Weston said.

For his part, Weston argued that the Fed’s “bringing out the big guns in May and using forward guidance to set the stage may be welcomed by the stock market – they weighed the outlook and feel credible The Fed is a strong Fed, and higher rates are better than entrenched inflation.

The Nasdaq-100 rose 1.5%, while the also tech-heavy Nasdaq Composite COMP
+1.84%
increased by 1.6%. Technology and growth stocks are seen as the most sensitive to rising Treasury yields, which lowers the present value of their future earnings and cash flows and is used to justify their high stock prices. The Nasdaq, however, already crashed into a bear market earlier this month, falling more than 20% from its record close in November.

However, stocks have rebounded considerably since the Fed kicked off the rate hike cycle last week with a 25 basis point hike in the fed funds rate and signaled that substantial monetary tightening is yet to come. Stock indices are now also trading above levels seen before Russia’s February 24 invasion of Ukraine.

The Dow Jones Industrial Average DJIA,
+0.62%
was up about 205 points, or 0.6% on Tuesday. The S&P 500 SPX,
+1.00%
gained 0.8%, with the large-cap index trading at its highest level since Feb. 11.

It’s important to remember that the S&P 500 was down nearly 15% to the February 24 low, meaning “a lot of bad news has been priced in,” and the risk outlook /reward have improved since the start of 2022, said Tom Lee, founder of Fundstrat Global Advisors. in a note.

The current market environment, however, is one in which investors should not attempt to “be a hero” or make a “big call”, he said, as markets are likely to remain volatile.

Pepperstone’s Weston noted that the Russian-Ukrainian war fueled inflation concerns as prices for crude oil and other commodities surged in volatile trading. Although this translates into periods of brutal slumping for stocks, it appears that the funds are “well hedged, there is tons of liquidity on the sidelines and the turnover is real”, he said, traders turning to energy stocks as crude soars and increases defensive positioning. in sectors such as utilities.

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