Optimism is spreading in the stock market as the Federal Reserve freezes interest rates.
Companies that benefit from stronger global growth rose yesterday after the central bank kept interest rates unchanged. Those include semiconductors, emerging markets, materials and industrials.
“The current stance of monetary policy is appropriate,” the statement declared, citing “global developments and muted inflation pressures.” It also indicated rates won’t move at all next year, and might rise just once in 2021.
While the move was widely expected, Fed Chairman Jerome Powell hammered the point home in his press conference: “To move rates up, I would want to see inflation that’s persistent and that’s significant.”
In other words, we’re not going to raise rates anytime soon. We don’t see any risk of overheating. We’re not going to take the punch bowl away. Taking it a step further, Powell may have left an open door to another interest-rate cut if growth slows again in the New Year.
“Persistent” and “significant.” Don’t be surprised if that becomes the next big catchphrase for people watching the Fed.
Economic Rebound Coming?
Investors worried about an economic slowdown over the summer, but those fears have faded in the last two months. Just consider some of the recent numbers.
Last week’s non-farm payrolls report crushed estimates and drove growth forecasts higher. Trade data and surveys from Germany also showed an unexpected recovery in the Euro Zone.
Credit markets have few signs of strain either. Usually before a recession, the yields on junk bonds rise as investors worry about bankruptcies. But just the opposite is happening now, according to Bloomberg and Merrill Lynch. Data from both shows yields falling and junk-bond prices rising. That’s another sign of risk appetite.
Some big names on Wall Street have gotten more bullish this week. Citi and J.P. Morgan raised their S&P 500 price targets. Even Bank of America CEO Brian Moynihan said consumers are spending about 5.5 percent more this year than in 2018.
New Highs for Chips
Chip makers led Wednesday’s rally with a 2 percent gain yesterday. Data from the Semiconductor Industry Association last week showed sales are starting to grow again after a nine-month contraction. Chip stocks are the best-performing industry group this year.
They’re important because the modern economy uses semiconductors everywhere. Not just in smart phones and data centers, but also in a widening array of industrial devices and machinery. Additionally 5G networks are expected to drive another wave of hardware upgrades over the next half decade.
Industrials are another sector investors look to profit from a stronger economy.
The Fed’s dovish policy weighed on the U.S. dollar index (@DX) because low interest rates reduce demand for the greenback. That, in turn, is often bullish for global currencies and international stocks.
Buyers Going Global
Global equities trade at lower multiples than domestic companies. The Vanguard FTSE Developed Market ETF (VEA), the biggest global fund by assets, has a price/earnings multiple of just 14.4, according to ETFdb.com. Meanwhile, the domestic SPDR S&P 500 fund (SPY) 500-tracking SPF is valued at 18 times.
Risks in other countries are a big reason for that discount. However two big uncertainties could disappear in the next week. Today, the U.K. holds big elections that could finally end the Brexit drama. Markets could also get clarity soon about $150 billion of tariffs planned to take effect against China this weekend.
In conclusion, stocks have rallied on hopes of economic recovery and friendly monetary policy. Both are now starting to take shape. Traders might want to guard against chasing strength in the near-term. However, the longer-term backdrop seems to keep improving.