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5 Reasons to Buy Stocks After the New Hawkish Fed

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Before this week's Federal Reserve meeting, I told investors that any negative reaction to the "dot plot" pace of interest rate hikes should be considered a buying opportunity.

Why would there be a negative market reaction? Because investors were "in the dark" about whether the Fed, led by Jerome Powell, would move from a bias of just three interest rate bumps this year to a more aggressive stance of one every quarter.

But all this hand-wringing is missing the big picture on what the economy is really doing and how the Fed is responding just right. Here are 5 market facts you need to grasp to understand the "game of fear and opportunity" that will make smart investors buy any dips they get this month...


1) The Path Higher is Clear

The path I am referring to is actually three paths: US GDP, US interest rates, and US corporate earnings, and thereby, stocks. All three are clearly headed higher at the same time. And that's a good thing.

This is what a late-cycle expansion looks like and it should not be feared but embraced by investors. With nominal GDP tracking 3.9%, the Fed can raise rates every quarter through 2019 -- that's six more hikes to a Fed funds target of 3.5% -- and still not harm the momentum of this economy.

Let me be very clear: real interest rates (minus inflation) are still very pro-growth -- and predictable -- and economic "animal spirits" are getting hotter. I explain more about each element in the next 2 reasons.


2) The Fed is Predictable

Even though market players need some time to get to know the new Fed chief Powell -- and they will get plenty of chances to do that with his more frequent press conferences -- the FOMC is still a team effort created by seven other voting members and several non-voting economist "influencers." Smart folks, prone to thoughtful decision-making, with lots of fresh and important data on their minds.

And what the "dot plot" of their minds showed us was only a modest shift in "hawkishness" toward the increased probability for two more rate hikes this year. And this is all based on their rising forecasts for GDP growth. They are clearly and logically data dependent and that gives us clear and logical predictability.

Plus, the FOMC did something completely unexpected and bullish at its May meeting. When those minutes were released we learned that the Fed is perfectly willing to let inflation run above its 2% target. This means they are still very committed to keeping the expansion going and they see no excesses in any asset classes -- except maybe cryptocurrencies.

Translation: the Fed has no problem letting the economy get hotter, even with unemployment under 4%. They want wage growth and they will do what it takes to get it!


3) Economy is About to Rock

You know how a recession has its own internal, negative feedback loop where as one part of the economy weakens, it causes others to contract as confidence crumbles and then they feed on each other in a vicious cycle?

Well, what we are finally seeing now, in an economy that grew slow and steady for eight years, is economic acceleration in a positive feedback loop. Manufacturing, housing, durable goods and retail sales data all speak to this momentum. And we see it from the "bottom-up" too as company earnings estimates rise.

Best of all, the American consumer is strong and spending (even with only modest wage growth) -- but he and she are not tempted by all the cheap money to get over-leveraged again like we did in the last decade.

All of these positives are now working in a virtuous cycle that will accelerate into 2019.


4) Trade War is Negotiable

While the Nasdaq and Technology leadership in the stock market was able to make new highs after the February-March correction, large multinational corporations in the Dow and S&P 500 have struggled under the weight of trade tariffs and policy uncertainty -- and the rising US dollar which impacts profits on exports.

But that rising dollar has benefited smaller US companies who don't rely on exports, and this is seen clearly in the chart of the Russell 2000 which has soared above my prediction from last summer to hit 1,600.

This net-net positive action in stocks -- which is primarily created by large institutional investors who do deep research on companies and have long-term views -- tells me that worries about the potential for a trade war are being absorbed and discounted.

In short, investors can see past this temporary uncertainty and believe that the US, its allies, and China will "work it out" for the benefit of the global economy.


5) Melt-Up Recipe is Cooking

Since January, I have been highlighting Cooker's Melt-Up Recipe, which consists of these 3 drivers on the back of a strong economy...

1) Multiple Expansion Is Under Control: We may be in the 7th inning of this bull market, but P/Es aren't nearly as high as they were at the peak of other euphoric rallies like 1999-2000. There is still plenty more upside to go before an exuberant valuation peak.

2) Investing Competition: There are less shares of stock and more investors, with more money, chasing them. And to keep their jobs on Wall Street, money managers have to buy, but they don't have to sell to catch the S&P.

3) No Global-Macro Angst: Whatever happened to the Eurozone crisis or China having a hard landing? For the first time in a decade, the global economy is in-sync and growing with little economic crises looming.

Obviously, I wrote driver number 3 before the trade battles erupted. But I think you can see that the strong forces of economic and earnings momentum can overwhelm the few negatives and make new highs in the stock market a very near reality.

It's why I told my followers in May to expect S&P 3,000 this year. And we are still building positions on dips in strong stocks to enjoy the ride there.


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Good Investing,

Kevin

Kevin Cook, Senior Stock Strategist at Zacks, is a leading expert in technical analysis and what makes markets move. He provides commentary and recommendations for Zacks TAZR.