Fed Raises Rates As Expected, Touts Economy And Upgrades Growth Forecast
The markets closed modestly lower yesterday. After weeks of heady gains, especially in the Nasdaq and the Russell 2000 Small-Cap Index, a little bit of profit taking was to be expected eventually.
We also saw the Fed raise interest rates by a quarter point yesterday, which the market was widely expecting. This shows the Fed's increased confidence in the economy, with Fed Chairman Jerome Powell saying "the economy is doing very well". He applauded the economic expansion, the strong labor market, and inflation moving closer to their 2% target.
Given that, the market is now expecting the Fed to raise rates two more times this year, bringing the total to four rates hikes vs. the previous expectation of three. Nonetheless, with growth picking up as it has, the Fed seems quite comfortable in being able to normalize monetary policy sooner as opposed to later. And the economy is in a great position to handle it.
Looking at their FOMC statement, they noted that "economic activity has been rising at a solid rate", and that "household spending has picked up, while business fixed investment has continued to grow strongly".
They also upgraded their economic growth forecast to 2.8% from 2.7% just a few months ago.
In other news, the only thing that may have made the market a bit nervous was word that the Trump administration could levy tariffs on up to $50 billion worth of Chinese goods as early as Friday.
The market has discounted the idea of a trade war as unlikely. And no, I still don't think a trade war will happen. But that doesn't mean there can't be some trade tension while these trade issues get worked out.
But it's important to note that President Trump floated the idea of removing all tariffs and trade barriers at the G-7 last week. So we know what the US would like to see – less tariffs or no tariffs at all. That's pretty much the opposite of a trade war. But getting there could be a bit bumpy. And the trade issue with China could be entering its next phase as early as tomorrow.
Nonetheless, the economy looks fantastic and so does the market. I'm expecting a breakout summer and an even better year-end finish.
By the way, if you're interested in gaining an edge on how to trade this historical market, consider adding a little bit of technical analysis into your decision making process.
I will be the first to tell that technical analysis had me buying the correction lows in 2015/16 when others were selling, it kept me in the market during this year's recent correction with unwavering confidence that stocks would soon turn back up, helped me take advantage of the Small-Cap breakout just last month, and has been instrumental in some of my most profitable trades.
But first you need to know which technical analysis items work and which ones don't. So be sure you check out our latest commentary...
5 Big Myths of Technical Analysis
Kevin Matras
Executive Vice President, Zacks Investment Research
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