Stocks could continue to rally in the coming weeks as investors expect the Federal Reserve to wind up its tightening cycle with one final hike as soon as March.
On Wednesday the central bank raised interest rates again, signaling it was satisfied enough with its progress in cooling off red-hot inflation figures to relax the increase to just a quarter point—its lowest since the cycle began in March.
DoubleLine CEO Jeffrey Gundlach, an expert in fixed-income investing often nicknamed “the Bond King,” said the Fed has painted itself into a corner by telegraphing to investors further rate hikes to come.
As a result, it would need to follow through one more time to retain credibility—yet that would be the end of the road, giving equities further upside potential.
“I do think we still have some room to run in risk assets as we get towards, maybe 4,300 or so, in the S&P 500,” he told CNBC.
On Thursday the benchmark index rose 1.5% to 4,180. That brought its cumulative gains to 9.3% since the start of January.
Investors have rediscovered their inner bull amid signs that the Fed has engineered a soft landing.
Inflation appears to have peaked, the widely predicted recession is now expected to be a shallow one, and continued robust labor market figures bode well for private consumption.
Fed Chair Jerome Powell added to the overall good mood on Wall Street after he said he was pleased with evidence that inflationary pressures in the goods market are easing.
In addition, pricing pressures for housing-related services, while not yet visible, were merely a matter of time in his estimation.
FOMC is still worried about half of the economy
There was one factor that clearly concerned the Fed chair, however, and that is a large chunk of the U.S. economy where there is no evidence of inflation abating.
In the personal consumption expenditures (PCE) index, a gauge of inflation preferred by the Fed over the conventional CPI, there is a bucket called core services ex-housing where there is no sign at all that prices are cooling off.
That’s why Powell was not prepared to call the peak of the tightening cycle with the policy-setting Federal Open Market Committee (FOMC) set to meet again in March to evaluate the path forward.
“It’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn’t get the job done, and inflation springs back,” Powell told reporters on Wednesday.
“We have a sector that represents 56% of the core inflation index where we don’t see disinflation yet, we don’t see it—it’s not happening yet. Inflation in core services ex-housing is still running at 4% on a six- and 12-month basis,” he noted, adding it would be “very premature to declare victory” at this point.
DoubleLine’s Gundlach hedged his bets as a result.
“Today feels a little bit euphoric,” he warned, referring to the strong rally on Wednesday. “People are bidding things up like crazy. We have to watch what happens.”
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