Reuters
The Fed is poised to hike interest rates today for the last time in the current cycle, according to Fundstrat. That’s because inflation has declined, the labor market is softening, and financial stability risks have increased.Stocks have historically performed well after the Fed implemented its last interest rate hike.
The Federal Reserve is poised to hike interest rates for the last time of the current cycle on Wednesday, and that has bullish implications for the stock market based on historical data.
Fundstrat’s Tom Lee called Fed Chairman Jerome Powell’s expected 25 basis-point interest rate hike on Wednesday a “dovish hike” because there are three clear reasons this will be the last bump for some time.
Those reasons include:
Sufficient progress being made on inflation which warrants the Fed to stop and look aroundSigns that labor demand is softening based on a decline in job openingsMounting risks of financial instability sparked by the regional banking crisis
“The Fed has repeatedly referred to the need to soften the labor market, meaning drive up unemployment rates, to contain age pressures seen driving services inflation. It certainly seems the momentum of the labor market shows that wage pressures should be quickly diminishing,” Fundstrat’s Tom Lee said.
Lee highlighted that the phrase “job cuts” has been mentioned on 154 company earnings calls, while “labor shortage” has plunged to just 31 from a peak of 138 at the end of 2021.
“And this comes at a time when over 200 references have been made to ‘credit tightening’ so this doesn’t point to a job market that will strengthen,” Lee said.
“The constellation of data is already pointing to a softening of labor market demand, jobs itself and eventually wages. And as such, the sticky part of inflation, core services ex-housing, will see a tailwind diminish,” Lee said. And if inflation continues to decline, that should give the Fed ample breathing room to pause further interest rate hikes.
Lee thinks the current environment surrounding what the Fed does at its FOMC meeting later today could be bullish for risk assets because stocks have gone nowhere over the past year, while deleveraging among investors has occurred.
From April 30, 2022 to April 30 of this year, the S&P 500 is up just 1%. Yet at the same time, investor sentiment has plunged 17%, retail money market cash has surged by $500 billion to nearly $2 trillion, and FINRA margin debt has declined by $128 billion to $645 billion.
“So you get the picture. Equity markets are actually up slightly year-over-year, but investors are far more negative and have deleveraged significantly,” Lee explained.
And according to Carson Group chief equity strategist Ryan Detrick, the stock market could print some impressive gains if the Fed does indeed stop hiking interest rates after today.
“Looking at the past 10 ‘last hikes’ the S&P 500 was up a year later 8 times and up more than 14% on average,” Detrick said on Tuesday. “In other words, this by itself isn’t overly bearish for investors.”
Carson Group