While it may seem stocks have been surging higher since the election a month ago, some areas of the market have stalled out and have retreated. The Fed will meet this week, and with markets at all time highs and broad sector rallies around each turn it appears there is not a weak spot to be found. Many bears have started to capitulate, and while this is more a process than an event we must continue to be aware of the bogey that could halt this tremendous rally. None other than the Federal Reserve Open Market Committee.
The Fed meets this week in the last meeting of 2016 and it is widely held they will raise interest rates for only the second time in a year. Some believe they will send a rather hawkish message with overtones of more rate hikes to come in the year ahead. While that will eventually be the case, the timing is certainly key. This is why we must still consider the Fed relevant, even if the election takes credit for this remarkable rally (sidenote: President-elect Trump was heard taking credit for the market rally on Dec 9).
What should we fear from the Fed if the stock market is sending the message that everything is 'okay'? Well, we should certainly respect the data as it comes in as that is what the Fed will be watching. If inflation starts coming in hot they are more likely to be aggressive. Now, as it relates to forecasts - the Fed members are some of the worst we have ever seen. So, trying to game trading off some forecasts of rate hikes in the year to come is useless. We will be listening very carefully to the content and the tone.
Let's also understand that in a world where the Fed is hiking rates it may not necessarily be good for the stock market at some point. Further, if the bond market does not react similarly then we're looking at a potentially dangerous situation - rising inflation and lower growth. However, the stock market is trying to tell a different and much more positive picture. If the Fed is lucky they may be able to detach themselves here - the time is right and the opportunity is now, but it may take some time before we get back to some normalization. The Fed has been patient, but no longer.