Last week the stock market rose for the fourth week in a row.
The increase wasn’t much, but it was an increase.
Why is this important?
Well, on March 16, 2022, the Federal Reserve announced that he was raising his policy interest rate. The policy range was now to be 25 basis points higher than it had been, raising the range from 25 basis points to 50 basis points.
The effective federal funds rate jumped from 0.08 percent to 0.33 percent.
And, the Fed monetary policy debate moved to how many more hikes there will be in 2022… five or six… and… and how big the additional hikes could be… 25 basis points or 50 basis points basic points.
Then there was also the discussion about how the Fed was going to reduce the size of its stock portfolio.
The stock market rose in the week before the March 16 Federal Open Market Committee meeting and continued to rise in the days immediately following the meeting.
On Friday, March 11, the S&P 500 stock index closed at 4,204.
On Friday, April 1, 2022, the S&P 500 closed at 4,546.
What is market signage?
OK, the Federal Reserve is tightening monetary policy.
Shouldn’t stock prices go down… and not go up?
What’s going on here?
Well, the latest stock market analysis coming from the Wall Street Journalpicks up the discussion after a very volatile performance on Friday.
“(Friday’s) wobbly trading session came a day after the S&P 500 closed its biggest quarterly decline since early 2020, falling 5 percent over the first three months of the year.”
Here’s how the first three months of the year went for the S&P 500.
The low, shown on this chart, is from March 14, two days before the Fed’s rate hike announcement was made.
My interpretation of this market behavior is that investors are having a hard time really imagining that Mr. Jerome Powell, the Fed Chairman and the FOMC are really going to get that tough.
I have written several articles over the last week or so discussing these concerns and how the concerns are represented in the data we are receiving now.
Also, investors have just received the new fiscal budget from the Biden administration, and it looks very expansionary with significant increases in government debt.
Couple this with the fact that there is a great deal of uncertainty surrounding the Russian invasion of Ukraine and the potential costs that may entail.
In other words, the Federal Reserve may be talking about tightening its monetary policy, but there are questions about whether or not this will happen, especially in light of the larger amounts of government spending ahead.
Another unknown in the investment community is the fact that long-term interest rates are rising.
Here you can see what has happened to the 10-year US Treasury note yield.
At the end of 2021, the 10-year bond yield was around 1.50 percent.
Last week, the 10-year bond yield hovered around 2.40 percent.
And, inflation expectations embedded in this performance on Friday were around 2.90 percent, up from 2.50 percent at the end of last year.
Yes, inflation expectations in the bond market have increased, but the rate of inflation being experienced is above 6.0 percent.
That is, “real” bond yields are in negative territory.
This is not a picture of tight monetary policy.
The point is that even though the Fed is talking about how it is tightening monetary policy, investors still feel that the financial markets are not really tight right now and that the “talk” from Fed “officials” Federal is not really that convincing.
Therefore, stock prices continue to rise.
Additional economic data continues to support the stock market’s stance.
“Employers added 431,000 jobs in March, marking 11 consecutive monthly increases above 400,000, the longest growth streak in records dating back to 1939. The unemployment rate fell from 3.8% to 3.6 per hundred”.
And, “the unemployment rate is rapidly approaching the February 2020 pandemic rate of 3.5 percent, which was a 50-year low.”
Additionally, commodity prices added more fuel to the conversation.
Prices that have been fueling inflation, such as oil, grain and metal prices, continue to raise expectations that consumer price inflation will not abate any time soon.
As one analyst added:
“Inflation floods everything!”
Radical uncertainty still rules the world.
There are too many things we cannot imagine about our future.
So, we try to develop a narrative.
The main narrative at the moment seems to be that the Fed, hoping not to “overdo” its efforts to tighten monetary policy, is trying to “ease” its way into the future.
The Federal Reserve is not hitting the brakes… like Chairman Volcker did in the 1980s.
But the market seems to be saying that the Fed is not even doing enough to be accused of tightening monetary policy.
So going forward, investors are driving stock prices higher.
This seems to be the current market narrative.