I heard three things from the Federal Reserve announcement last Wednesday afternoon that promise to support the market.
U.S. stocks will be a lot higher by the end of the year. There’s big money to be made between now and then, thanks to the Fed.
The Fed — America’s central bank — is like a bartender for the U.S. economy. It can’t control how much money is lent out, but it can control how much is available and, to some extent, how much it costs.
The Fed uses monetary policy to help ensure financial stability in the economy and markets.
That’s all that matters for investors these days.
And if history is any guide, the Fed could help push the bull market all the way into 2021.
A similar recalibration between the market and the Fed has occurred before.
Check out what happened…
The Fed shifted its stance in the middle of 2016. It postponed rate hikes to reassure the market. And the market rose 38% in the following 18 months.
The S&P 500 Could Rise 14% by the End of the Year
The Fed’s latest shift should cause the stock market to break out again.
If a new breakout sparks a rally that matches the duration of the 2016 rally, this bull market could last until 2021.
It’s tough to say if the market can tack on another 38% to current levels.
But the S&P 500 Index could rise 14% by year’s end if it just matches its early 2019 rally.
Either way, there is a lot of money to be made before today’s 10-year-old bull market ends.
Let’s go over the three reasons from Federal Reserve Chair Jerome Powell’s comments last Wednesday.
Reason No. 1: “Sustain the expansion.”
U.S. stocks rose 150% since the start of 2012 because investors expected the U.S. economy to outperform the rest of the world.
U.S. unemployment is near a record low. The U.S. economy is growing at about 3% per year.
But investors are questioning how much longer the economy can keep buzzing along.
The Fed is thinking about cutting interest rates to help sustain the expansion.
That’s a huge shift from the start of the year.
The Fed hiked rates a few times last year and was prepared to hike a couple more times this year.
Then investor sentiment soured in May because of the U.S. trade war with China. And the S&P 500 fell 6%.
Now, traders believe the Fed will alleviate their worries with four interest rate cuts in the next 12 months. Think of the bartender analogy again. Rates cuts are like happy hour for investors.
Dang! Talk about whiplash.
Long live the bulls.
Reason No. 2: “Continue to hold inflation down.”
The Fed uses its benchmark interest rate — the Fed funds rate — to make it easier or harder for businesses and consumers to borrow money.
The Fed wants to see some inflation in the economy.
Not too much, not too little, but the right amount.
And it seems that 2% is the right amount for businesses to make more money, workers to take home more money and consumers to spend more money into the economy.
Powell said wages are not rising fast enough to push inflation higher. And he said weak global growth could continue to hold inflation down.
Low inflation gives the Fed wiggle room to support the economy without causing it to overheat.
Wiggle room reassures the market that there’s still time until last call.
Long live the bulls.
Reason No. 3: “Moderate.”
The Fed changed its assessment of growth in the U.S. economy from “solid” to “moderate.” That change went mostly overlooked.
But moderate is a loaded word…
As I mentioned in my YouTube video last week, the late stage of an economic expansion is characterized by moderate growth.
The market welcomes this downgrade from solid to moderate because it’s another indication the Fed stands ready to provide support to the economy.
If the Fed is supportive, the market can keep going up. Period.
That’s the mindset. And it’s still the best bet.
Long live the bulls.
Caution: Moderate Economic Growth Ahead
If there’s any reason for caution, it’s that the Fed changed solid to moderate.
Most analysts overlooked the change, but we shouldn’t.
Economists agree the U.S. economy is in the late stage of its cycle. Even the Fed says growth is “moderate.”
This means that expansion has passed its peak.
When moderate growth fizzles out, the economy moves into a recession.
Typically, the economy experiences inflation before a recession arrives.
The Fed wants to see inflation pick up. If it doesn’t, it may have no power to sustain the expansion.
The U.S. economic expansion could conceivably skip past inflation and move straight into a recession without much warning.
We should keep the economy’s cycle in mind. It’ll help us preserve our wealth if recession sneaks in.
Stay invested. But stay tuned. I’ll be watching to see if the Fed loses control.
Senior Analyst, Banyan Hill Publishing
P.S. Watch my latest YouTube video where I talk about the economic cycle and the impact it’ll have in a certain sector. And check out my YouTube channel. Hit the subscribe button to stay up-to-date on new content.