Will Stocks Rally if Powell Hikes Tomorrow?

Fed Chairman Jerome Powell

Stocks rallied again today as the market geared up for tomorrow’s rate hike. The Dow, S&P, and Nasdaq Composite all gained, led higher by surging bank shares. First Republic (NYSE: FRC) soared over 40% through noon while other regional banks jumped, too, after Treasury Secretary Janet Yellen spoke on the recent banking crisis at the American Bankers Association’s 2023 Washington Summit.

“The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader US banking system,” Yellen said.

“And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

She continued, adding:

“The situation is stabilizing and the US banking system remains sound. The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. Aggregate deposit outflows from regional banks have stabilized.”

In other words, if there’s a run on your bank, the government will backstop those deposits. That lifted some pressure off bank shares as a result.

But is the situation truly stabilizing? It could be. Alternatively, this might just be the calm before the storm. We examined last week how rising commercial real estate loan defaults could skewer regional banks, which hold roughly 70% of the commercial real estate loans.

If that happens, the Fed and Treasury could be called on again to prevent another banking meltdown.

For now, though, a “stabilized” situation (according to Yellen) has analysts wondering if the Fed will truly raise rates by 25 basis points tomorrow, or opt for a “no hike” meeting instead.

“The game has changed a little bit here just in the past month with the banking situation that we that we’re currently facing, so I think that’s one of the things that [the Fed has] to consider,” said Commonwealth Financial Network’s Brian Price.

JPMorgan strategist Michael Feroli still thinks we’ll see a 25 basis point hike before the Fed takes its foot off the gas, leaving the Fed Funds Rate in the 5.00% – 5.25% range indefinitely. He believes a pause tomorrow would be a major surprise given persistently high inflation.

And Feroli’s absolutely right. What’s more, if the Fed pauses, that doesn’t necessarily send a very good signal to markets. There’s also the concern that the Fed’s recent tightening has broken something else that’s yet to be discovered.

But considering that Powell is taking a “data-driven approach” (what other choice does he have?), there’s no reason for him to halt the rate increases just yet, especially if Yellen’s speech this morning is to be believed.

And so, with stocks rising today, the market could be approaching a bullish reversal even if the Fed raises rates tomorrow. Powell’s post-hike press conference will be critical, as usual, and any dovish leaning could lead to a massive upside for stocks. That’s doubly true for rate-sensitive tech names, which are primed for a huge intraday rally should Powell say that March’s hike is the last one prior to a multi-month pause.

Because even if Powell says rates are going higher again later this year, history suggests that’s almost certainly not going to happen. Every time the Fed stopped raising rates in the past, rate cuts and significant easing imminently followed. That’s what bulls are hoping for, and thanks to the recent bank crisis, they might just get it.


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