Fed Fund Futures’ Reaction To CPI
The Fed fund futures for the March meeting show the chance of at least one rate hike went up from 68% before the data released to 73.7% after the data was released. Even though this is a small change, getting above the 70% threshold is pivotal because the Fed almost never raises rates when the chance is below 70%. As I said, the core CPI will determine if the Fed hikes in March. This is the last report until the January 31st rate decision. Because January’s meeting doesn’t have a press conference, there’s less room to signal a hawkish tone. Even if there was a statement, it wouldn’t matter much because Powell is taking the helm soon afterwards. It would be interesting to see if core inflation went up causing Powell to start out hawkish. Then some investors would think he was a hawkish Fed chair even though the data created the situation. That could spook the market.
The Second Longest Bull Market
Before I get into the details on the recent action in stocks, let’s take a step back and admire the bull market. As you can see, this is the 2nd longest bull market since 1945. In one year, it will be the longest which makes sense because this will be the longest expansion around then as well. It’s also the 3rdlargest rally. Breaking down how this rally came to be, 46% of returns came from earnings growth, 21% came from dividends, and 32% came from multiple expansion. This is interesting because many value investors claim that stocks can’t increase their multiple in the next few years; they say price appreciation needs to come from earnings growth. I disagree with that statement for two reasons. The first is that multiples depend on inflation. If inflation stays low, I wouldn’t be surprised to see more expansion. Secondly, this market isn’t always rational. Euphoria is not a logical reaction. Therefore, momentum can take the market to unbelievable levels.
