Good Evening. Here is today’s recap on the in’s and out’s of the major market and economic events.
Investors weighed encouraging economic statistics out of Washington alongside Wednesday’s Federal Reserve statement as Wall Street’s major indexes closed in negative territory on Thursday, following a sharp U-turn earlier in the day to erase morning gains.
The Dow Jones finished slightly below its flatline, reversing earlier gains, while the S&P 500 dropped 0.54%, reversing earlier advances as well. The Nasdaq was driven down by losses in Tesla (TSLA), which brought the Nasdaq down 1.4 %.
US ECONOMY
In the last months of 2021, the United States’ gross domestic product (GDP) increased, with still-strong consumer spending helping to drive growth and offset early negative effects from the Omicron variant’s spread.
The Bureau of Economic Analysis said on Thursday that the US economy grew at a faster-than-expected 6.9% annualized rate in Q4, compared to a consensus estimate of 5.5% among Bloomberg economists.
The fourth quarter’s growth outperformed expectations, rebounding more than expected from the third quarter’s poor rate of expansion, when GDP increased at a 2.3% annualized rate, the slowest since mid-2020.
The Federal Reserve is planning to raise interest rates after their next meeting in March.
- In the Fed’s words: “With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
- This time, in English: “We’re probably going to hike interest rates after our next meeting in March.”
It would be the first time the Fed has raised borrowing prices since 2018, and it would be a striking symbol of the economy’s comeback from the depths of the Great Recession when the Fed cut interest rates to near zero.
Of course, the Fed didn’t have to hike interest rates in March; but sky-high inflation changed the equation. President Biden, Federal Reserve officials, and Chicago-based options traders have all expressed alarm about rising prices, prompting the Fed to shift course in December and plan for a series of rate hikes this year.
Wall Street’s perspective
Concerns about rising interest rates have decimated the stock market this year, particularly tech equities, which become less appealing as bond yields rise (as they have been).
The S&P 500 is down 9.31% year to date, on course for its worst start to a year ever. The Nasdaq, which is focused on technology, has entered the correction zone, down roughly 15% year to date.
However, rising interest rates do not always mean the stock market is doomed. In fact, the reverse is true. According to Truist co-chief investment officer Keith Lerner, the S&P 500 has delivered positive returns in 11 of the 12 Fed rates raise cycles since the 1950s.
- Why is that? Because while the economy is growing, the Fed tends to boost interest rates, and a growing economy is generally good news for corporate profitability.
Looking forward… “How many times will the Fed raise rates this year?” is the new question. Goldman Sachs predicts four hikes, but Powell hasn’t ruled out a raise at each of the Fed’s remaining seven meetings this year to combat inflation, which he says has grown “just a bit worse.”