Equities rallied last week in the absence of Fed speakers, while Fixed Income was mixed.
So far, 29% of S&P 500 companies have reported Q4 earnings and 69% have exceeded estimates (up from 67% the previous week) and only 60% have reported revenues above estimates. The Fed will meet this week to determine the next rate hike. The market has widely accepted a hike of 25 basis points for Wednesday’s announcement, but has already turned its attention to March’s rate decision. Implied futures for March also indicate a 25 basis point rate hike, but at least an 11% probability of no hike. The Fed’s favorite inflation indicator, PCE Prices, declined again last month and has dropped in 5 of the last 6 months.
Goldman Sachs' measure of sentiment indicators show a move towards “risk on.” Just 3 months ago, 14 of the 17 indicators were in "risk off" mode. Since then, all but 4 have trended toward "risk on," with 3 fully in "risk on" mode.
The Fed may attempt to douse cold water on the recent equity rally in favor of dampening the “wealth effect.” If consumers have higher 401ks, IRAs, and bank accounts, spending typically continues at a healthy pace. The Fed may seek to encourage less spending with hawkish comments this week. The good news is that history is favorable to markets when equities are up in January after a negative calendar year. Since 1954, the S&P 500 has ended the year positive when finishing January up after a negative calendar year. On average, the return for the full year has been +29.7%. Expect some choppy trading this week as the markets try to determine the Fed's intensions for March and beyond in Chairman Powell's press conference on Wednesday.
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