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 Recent economic data has relieved concerns that the United States
might be heading for a recession and helped fuel the benchmark S&P
500 index's <.SPX> 11 percent recovery since mid-February.
But evidence of improving domestic conditions could also prod the
Fed to speed up planned rate increases and thereby potentially
dampen enthusiasm for stocks.
In its statement following a two-day policy meeting on Wednesday,
the central bank is widely expected to hold its key rate steady
after hiking it in December for the first time in nearly a decade,
while economists polled by Reuters expect an increase by the end of
June and one more before the year is out.
"It’s going to be a session with parsing individual words in the
statement about how likely the market believes the Fed is to move,
how quickly they are going to move for the next hike," said Walter
Todd, chief investment officer at Greenwood Capital Associates in
Greenwood, South Carolina.
Should the Fed give any hints it will get more aggressive on rate
hikes than the market projects, it could blunt the momentum for
stocks.
While investors may be betting on one increase for the rest of the
year, Todd said, "the Fed in its last statement made it pretty clear
that they want to go more than that."
Traders are discounting any change in rates when the Fed meets next
week, according to the CME Group FedWatch tool.
"Everybody has planned accordingly for no action, so if there is an
action I think that would have a negative effect on the market,"
said Jonathan Corpina, senior managing partner for Meridian Equity
Partners in New York.
The Fed has kept interest rates at near zero for virtually all of
the current bull market for stocks, which marked its seven-year
anniversary on Wednesday.
More recently, the outperformance of consumer discretionary stocks
over the consumer staples sector over the past month is evidence of
investors betting on the Fed keeping rates unchanged for now,
according to S&P Capital IQ.
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"The equity 'risk' switch has been in the 'on' position for the past
few weeks," S&P Capital IQ said in a report.
With the S&P tracking to its fourth straight positive week, the
index is now off only about 1.5 percent for the year. So far in
March, every S&P sector has posted gains, led by energy shares.
In recent months, stocks generally have correlated tightly with
fluctuations in depressed oil prices, so the run of U.S. crude
<CLc1> into positive territory for 2016 and back to around $40 a
barrel has been a key factor in the stock market's bounce.
The stabilizing of other commodity markets and easing of concerns
over China's economy has also buoyed stocks along with
better-than-expected U.S. data.
Next week will bring additional readings on the health of the U.S.
economy, including reports on retail sales, housing and industrial
production.
"The stock market rallied because we got evidence that we’re not
recessing and we were pricing in a recession," said Jim Paulsen,
chief investment officer at Wells Capital Management in Minneapolis.
"But ultimately," Paulsen said, "if the U.S. economy is OK, rates
are going to be an issue."
(Editing by Linda Stern and Bernadette Baum)
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