Why Did Stocks Rally Yesterday?

Stocks traded flat this morning following yesterday’s major surge into the close, which came immediately after Fed Chairman Jerome Powell’s post-FOMC meeting remarks.

Over the last few days, bulls were clearly worried that Powell would shift more hawkish than expected. And though the Fed did make a hawkish pivot, Powell left the door open for continued dovishness at the same time.

“Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” the Fed chairman said in his afternoon press conference, revealing an accelerated taper ($30 billion per month) and seven total rate hikes over the next three years, with three coming up in 2022.

That’s a large number of hikes, and coincidentally, exactly what Goldman Sachs predicted last week. Most Wall Street banks expected fewer hikes by comparison.

But still, stocks rallied in response to Powell’s comments, which provided a dovish spin on what could have been received as a highly bearish impulse.

“While the three rate hikes for ’22 projected by the dot plot likely raised more than a few eyebrows, keep in mind that would still keep us within the realm of historically low rates, and further the market often moves positively when it has a clearer picture of the future, which the Fed no doubt provided,” explained E-Trade strategist Mike Loewengart.

Other analysts agreed.

“I think what the market was looking for more than anything was certainty […] It got that yesterday. There was a lot of bearish sentiment that was building up in the market,” said Mercer Advisors’ Don Calgani before adding that the Omicron variant could serve as Powell’s “get out of jail free card” if the Fed needs to shift dovish once more.

And that’s really what sent stocks higher yesterday, the idea that the Fed’s rate hike schedule is by no means set in stone. Investors not only know that, but they may not even believe that the Fed will actually hike rates when the time comes.

The Fed’s first rate hike is scheduled for May 2022, a point at which Powell thinks the US will have achieved significant economic progress alongside a much lower unemployment figure.

But will the US economy actually meet Powell’s goals? Probably not. Don’t forget that both Powell and Treasury Secretary Janet Yellen were completely wrong about inflation. For months, they argued that it was merely “transitory.”

Then, in late November, Powell chose to officially retire the term “transitory,” opting instead to describe inflation as “persistent.”

The November Producer Price Index (PPI) confirmed that to be the case several days ago when it came in far hotter than expected, rising 9.6% year-over-year vs. the +9.2% consensus estimate.

So, don’t expect Powell to be right about how the US economy will look in May of next year. Nobody has a crystal ball, not even the reigning Fed chairman.

Stocks may be stalling today, but make no mistake: a “Santa rally” is coming if the S&P can take out its all-time highs before Christmas.

Which, with a hawkish-but-also-dovish Powell directing traffic, seems like an inevitability at this point.


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