Summer is traditionally regarded as a sluggish time for U.S. stocks, given the Wall Street adage: “Sell in May and go away.” This year, though, may turn out to be markedly different from past years.
One reason is bullish investors are steadfastly holding on to the view that U.S. inflation is set to fall by more than the Federal Reserve forecasts, and that’s setting the stage for a possible showdown in the months ahead with policy makers, who want more interest-rate increases to push inflation back down to 2%.
The S&P 500 SPX, -0.37% and Nasdaq Composite COMP, -0.68% booked their longest streak of weekly advances in years on Friday, as equity investors largely brushed aside the Fed’s guidance that it will likely be appropriate to lift its policy interest rate to around 5.6% by year-end from a current level between 5%-5.25%. Ultimately, it will be up to economic data to determine whether the market has gotten ahead of itself by thinking that the Fed won’t have the nerve to deliver two more 2023 rate hikes.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance in Charlotte, N.C., which manages $10 billion in assets, said his firm believes that “inflation is here to stay and risks becoming entrenched unless the Fed raises rates much more than the market is currently expecting.”
Theoretically, Zaccarelli said by phone, policy makers would need to raise rates by another 75 to 100 basis points — or more than the 50 basis points of hikes implied by policy makers’ projections — to put inflation on a path toward 2%. However, he doesn’t see that happening. Fed officials are “talking tough, but we don’t think they will actually hike more than one more time, before holding rates steady above 5.25%-5.5% for six to 12 months.” Click HERE to read full article.