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This Week's Wall Street Cheat Sheet

Fed Holds Rates Steady, Market Bulls Rally on Rate Cut Forecast (Weekly Cheat Sheet)

The stock market had a stellar performance, propelling the three major indices to fresh record highs. The S&P 500, in particular, closed above the 5,200 mark for the first time, with an impressive 2.3% gain. The Nasdaq Composite jumped 2.9%, while the Dow Jones Industrial Average gained 2.0%. These gains were largely fueled by the announcement of the Federal Open Market Committee’s (FOMC) policy. As expected, the committee unanimously voted to leave the Fed funds rate target range unchanged at 5.25-5.50%. However, the real catalyst for increased buying activity was the closely-watched dot plot, included in the updated Summary of Economic Projections (SEP), which showed that the Fed still anticipates three rate cuts this year despite recent inflation readings coming in hotter than expected. During his press conference, Fed Chair Jerome Powell reiterated previous comments, indicating that the Fed needs more evidence that inflation is moving toward the 2% target before cutting rates. He also mentioned that it would be appropriate to slow the pace of asset runoff fairly soon. Rate cut expectations moved up this week, contributing to the positive bias in the stock market. According to the CME FedWatch Tool, the implied likelihood of a June cut rose to 75.4% from 58.8% last week. The price action in Treasuries also played a role in the stock market’s positive sentiment. The 2-yr note yield declined 12 basis points to 4.60%, and the 10-yr note yield fell eight basis points to 4.22%. Mega-cap stocks had an outsized impact on index gains. The Vanguard Mega Cap Growth ETF (MGK) rose 2.5% this week, while the equal-weighted S&P 500 rose 1.4%. U.S. Market Highlights Here are some notable events that shaped the U.S. markets this week: Global Market Highlights The global markets also saw some significant developments: Investor Takeaways In my view, this week’s market action reflects growing confidence in a “Goldilocks” economic scenario – not too hot, not too cold. If the Fed can tame inflation without causing a recession, it would be the best outcome for stocks. However, I would caution against getting too complacent. Risks remain, from geopolitical flare-ups to the potential for inflation to prove stickier than expected. As an investor, it’s important to stay diversified and not overreact to short-term swings. If the Fed does cut rates, there is a huge risk this will ignite inflation. I will be watching it and using tools like Truflation to get an idea of what is happening real time. Looking ahead, the market will be watching for signs that the Fed’s rate hike campaign is having the desired effect on inflation. Any evidence that price pressures are cooling could fuel hopes for rate cuts later this year, providing a further tailwind for stocks. One interesting fact: since 1950, the S&P 500 has averaged an 8.4% annual return (not adjusting for inflation). Patience and consistency tend to pay off over the long run. Of course, predicting the future is never easy. I strive to help my readers navigate the complexities of the ever-changing market landscape. ...
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