The major U.S. stock indexes are trading higher shortly after the cash market opening on Thursday after yesterday’s Fed minutes offered a little clarity for investors while still presenting a hawkish tone. Investors know the Fed has to raise rates to fight inflation, but they don’t like uncertainty.
The only way to hedge uncertainty is to sell your stock. But with the Fed minutes providing somewhat of a guideline as to the pace and duration of further rate hikes, at least investors have a little clarity into what policymakers are thinking. With that in mind, they can hedge some of risk.
GDP Misses, but Not Badly; Job Market Still Tight
Economic growth wasn’t as strong as originally thought as 2022 came to a close, the Commerce Department reported Tuesday. Gross Domestic Product increased 2.7% at an annualized pace in the fourth quarter, down from the initial 2.9% estimate. Economists were looking for another 2.9% reading.
Meanwhile jobless claims edged lower to 192,000 for the week ended Feb. 18, the Labor Department reported. That was 3,000 less than the week before and slightly below the 197,000 Dow Jones forecast.
Fed, Investors Remain Data Dependent
On Wednesday, the Fed minutes said that policymakers are resolved to keep fighting inflation with rate hikes. Inflation “remained well above” the Fed’s 2% target and the labor market “remained very tight, contributing to continuing upward pressures on wages and prices,” according to the minutes.
This comment suggests that the Fed is setting policy on each report on inflation, labor and spending, rather than relying on long-term forecasts like they’ve done in the past.
Investors have also adopted the same “data dependent” though process. But not only are they concerned about rate hikes, but also about the possibility of a recession.
Today’s economic data on GDP, Weekly Jobless Claims and the GDP Price Index is helping to underpin the stock market. All three signaled the need for further rate hikes, but they also revealed a strong underlying economy, which could help soften the blow of a recession.
So basically, we have a situation where investors are not being rattled about rising interest rates or a hard-landing recession and feel comfortable about playing the long side and gobbling up some of the beaten up stocks.
This could lead to the start of a strong short-term rally because investors are buying today with clarity and conviction.