The Stock Market Rises as Powell Keeps His Wait-and-See Approach

Following Jerome Powell's reiteration of the Federal Reserve's cautious approach towards interest-rate adjustments, the stock market maintained its upward trajectory.

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While Powell's statements didn't unveil any groundbreaking revelations, his remarks provided reassurance to Wall Street as he suggested that recent inflation data hadn't significantly altered the overall economic outlook.

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Moreover, Powell reiterated the Fed's intention to likely commence rate cuts "at some point this year." Equities had already been on the rise prior to Powell's speech, buoyed by a report indicating a slowdown in services and a decrease in prices to a four-year low. Additionally, bond prices rebounded from earlier session lows.

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In recent days, traders had tempered their expectations for rate cuts amidst signs of economic resilience and a more hawkish tone from various Fed officials. This shift in sentiment raised doubts regarding the central bank's ability to fulfill its projection of three rate reductions by the year's end, consequently dampening investor confidence.

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"The Fed has emphasized its reliance on data," explained Omar Aguilar of Schwab Asset Management in an interview with Bloomberg Television. "It seems more like the market is aligning with the Fed's stance rather than the Fed adjusting to the market's expectations."

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The S&P 500 surpassed the 5,200 mark following its most significant drop in roughly a month. Meta Platforms Inc. spearheaded gains among megacaps, while Intel Corp. faced losses after issuing a disappointing outlook for its manufacturing operations. Meanwhile, 10-year Treasury yields remained relatively stable at 4.36%, and oil prices climbed following affirmations of current supply cuts from OPEC+ ministers.

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"Despite maintaining a cautious approach to the markets this year, it's difficult to ignore the prevailing momentum," remarked Victoria Fernandez of Crossmark Global Investments. "We anticipate some market turbulence in the coming quarters due to mixed economic data and uncertainty surrounding the duration of the Fed's pause."

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Yung-Yu Ma of BMO Wealth Management anticipates a period of stock-market consolidation rather than a correction.

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"We might witness volatile market activity as investors digest inflationary pressures, the Fed's stance, oil prices, and long-term interest rates – all of which could influence market movements and contribute to near-term volatility," Ma explained. "However, given the robust economic growth, the stock market should regain its footing once these concerns abate."

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Eric Veiel of T. Rowe Price Group Inc. warned against the risk of the Fed jeopardizing its credibility by prematurely cutting rates.

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"Jerome Powell has emphasized his study of the seventies economic era," Veiel noted during a Bloomberg Television interview. "If the Fed proceeds with rate cuts prematurely, it runs the risk of repeating historical mistakes."

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In the 1970s, the central bank hastily eased policy before effectively tackling inflation, a misstep even acknowledged by renowned central banker Paul Volcker in 1980. Despite a "solid" outlook for a U.S. soft landing, stock investors' expectations have become stretched, prompting Morgan Stanley's wealth management division to advocate for seeking opportunities beyond the S&P 500.

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Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett highlighted the S&P 500's rally, attributing it to multiple expansion as investors anticipate improved profits amid slowing growth. Additionally, Citigroup Inc. strategists noted "persistent" demand for U.S. stocks, indicating potential for the rally to resume following the recent pullback. Last week, over $16 billion in net long positions was added to S&P 500 futures, while exchange-traded funds witnessed net inflows, as outlined by strategists led by Chris Montagu.

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