Author: Kristina Hooper (Chief Global Market Strategist)
Last week’s Federal Reserve (Fed) meeting proceeded largely as expected, but a very important development for stocks occurred during the follow-up press conference.
As expected, the Fed decided to cut rates by 25 basis points. Additionally, in its announcement, the Fed removed the language that stated it would “act as appropriate to sustain the expansion.” This was a change that many expected and some feared, as it suggests a higher hurdle to cut rates going forward. I worried that the removal of this language in the Fed announcement could have been negative for stocks. After all, expectations were relatively high that the Fed would cut rates again.
However, Fed Chair Jay Powell did something very significant at the press conference: He assured markets that the Fed will not raise rates until inflation increases significantly — which seems very unlikely any time soon given the data we have been seeing. Essentially, this gives stocks free rein to perform as they will without the concern that the Fed will unexpectedly tighten its grip. The result was a rally for stocks. From the time that the press conference started on the afternoon of Oct. 30 through end of day Nov. 1, the S&P 500 Index rose 1.06%.1
Is the stock market rally sustainable?
As I have said before, monetary policy can have a more positive impact on asset prices than on the general economy, and I believe that will continue to be the case going forward. The rally we experienced last week after Powell’s press conference could very well continue. At the very least, I expect a strong positive bias for stocks in the coming weeks.
Of course, that begs the question of what could possibly derail a Fed-induced rally. The following are several possible factors:
Despite the potential rally-stoppers described above, what happened last week at Powell’s press conference was nothing to sneeze at. Make no mistake — the Fed has loosened its grip and given US stocks free rein to run as we head into the end of the year.
1 Source: Bloomberg, L.P.
2 Source: Institute for Supply Management — Chicago, as of Oct. 31, 2019
3 Source: Institute for Supply Management, as of Nov. 1, 2019