SPY Rallies To Just Under 260 – Sideways At Best, Downward At Worst Likely Path Near-Term

Since the intraday low on Boxing Day, SPY is up nearly 11 percent.  Too far, too fast?  Possibly, as the ETF is just a hair breadth away from support-turned-resistance at 260, which it lost mid-December.

The Fed has a dual Congressional mandate of maximum employment and stable prices.  But it seems to have evolved over time – particularly the past two decades.  Increasingly, it seems the central bank is as serious about influencing the financial markets.

On October 3, Jerome Powell, Fed chair, said rates were still “a long way” from neutral, suggesting continued tightening in the weeks/months ahead.  On that very day, the S&P 500 large cap index began what soon turned out to be a waterfall dive.  The FOMC did go ahead and raise the fed funds rate by 25 basis points in the December 18-19 meeting to a range of 225 to 250 basis points – its ninth 25-basis-point hike since December 2015.  Stocks continued to drop, despite a U-turn from Powell on November 28 when he said interest rates were “just below” neutral.  Markets demanded more explicit language.  On January 4, Powell said he is “listening sensitively to the message that markets are sending,” about downside risks to the economy, adding “we will be prepared to adjust policy quickly”.

The advantage Powell, and other FOMC members, have is, depending on their hawkish or dovish bias, they can toggle between jobs and inflation.  The Phillips Curve is dead in the current cycle.  The US unemployment rate has remained sub-four percent in the past six months, but inflation remains subdued.  Core PCE and CPI have trended lower since reaching multi-year highs last July (Chart 1).  Last Thursday, Powell said inflation is “low and under control,” hinting where his focus might lie in the months ahead.

As opposed to the October-December rout, stocks are much calmer (Chart 5).  From the Boxing Day low to last Friday’s high, the S&P 500 is up 10.6 percent.  This, in combination with downward revision in earnings estimates, quickly put upward pressure on forward valuation multiples.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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