The Federal Reserve pushed interest rates to a 22-year high on Wednesday, with another 25 bps move. It’s not enough for the central bank to declare victory on historic inflation just yet, but it sure looks like markets are charting their next steps, with the CPI now down to 3% (from a high of over 9% seen last summer). For the week, the Nasdaq advanced 2%, the S&P 500 added 1% and the Dow Jones average rose 0.6%.
The quarter point hike Wednesday, which came after a rare pause in the rate hike cycle in June, sends the overnight rate to a new range of between 5.25% and 5.5%, while inflation hovers above the Fed’s 2% target rate at around 3.5%. Even though rate hikes are generally seen as a drag on stocks, stocks continue to rally signalng that the June pause in the rate hike cycle could be a precursor to another pause in September.
US economic growth picked up steam in the second quarter thanks to resilience among consumers and businesses despite high interest rates. Gross domestic product rose at a 2.4% annualized rate compared with 2% over the previous three months. Consumer spending increased at a 1.6% pace, which was more than predicted.
Are these the signs of the beginnings of the next bull market?
Future Wealth’s View
There is much debate as of late on the current market cycle. Is the bear market over? Maybe. But what if the last 12 months was just a correction within a 40 year long secular bull market cycle? The US economy keeps plowing ahead despite all those predictions that the Federal Reserve’s rate hike campaign would trigger a downturn. Indeed, talk of a recession among perpetual skeptics has all but petered out.
But, a resilient housing market and strong consumer spending could mean the Fed Chair’s war will continue into the Fall, either by way of more rate hikes or simply keeping rates where they are for longer. Unfortunately, most investors do not understand market dynamics and how prices are ultimately bound by the laws of physics. While prices can seem to defy the law of gravity in the short term, the subsequent reversion from extremes has repeatedly led to catastrophic losses for investors who disregard the risk.
Just remember, in the market, there is no such thing as “bulls” or “bears.” There are only those who “succeed” in reaching their investing goals and those that “fail.”