After weeks of speculation and nervousness about an interest rate hike, the Federal Reserve confirmed Wednesday that an increase is likely. However, the market gushed over the fact that the Fed would take its time in raising rates — and stocks rallied as a result.
The Dow Jones Industrial Average closed up 1.27 percent to 18,076.19 and the S&P 500 inched up 1.21 percent to close at 2,099.42 while the WWD Global Stock Tracker rose 0.58 percent to 115.60. Of the 100 companies in the tracker, 69 stocks advanced, 30 declined and one remained unchanged.
The Fed noted decelerating inflation and a stronger labor market reflected some strength in the economy, but things could be better — especially when considering the impact of a strong dollar on U.S. exports. Analysts and investors walked away from the Fed announcement thinking rates may not go up until September.
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Meanwhile, a pullback in U.S. equities by global investors is expected to continue. In a survey by Bank of America Merrill Lynch, global fund managers said they’ve “significantly pared back U.S. equity allocations” due to an expected rate hike. The survey reported that a net “19 percent of global asset allocators are now underweight U.S. equities — the biggest underweight since January 2008 and a big swing from a net 6 percent overweight in February.”
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But where are they putting their money? The survey noted the Eurozone and Japanese stocks were the expected targets. “But investors have indicated that the shift to Europe has only just begun,” the report stated. “A net 63 percent of respondents say that Europe is the region they would most like to overweight in the coming 12 months — a record since the question was first asked in 2001.”
Still, it’s unclear how much upside is left in Eurozone equities. As reported Tuesday, shares in Europe have been trading at significantly high values for the past six months.
Michael Hartnett, chief investment strategist at Bank of America Merrill-Lynch Global Research, said in the report that investor consensus “suggests that the strong dollar will act as positive rather than a negative for the global economy and markets.” Hartnett’s colleague, Manish Kabra, European equity and quantitative strategist, added, “bullishness toward European stocks has reached uncharted territory. Demand for financials highlights confidence in domestic growth, while belief in European exporters is building on gains seen last month.”
At face value, conditions are solid from an investment perspective, but historically high stock valuations suggest that more market corrections are looming. Add to the equation plummeting crude oil prices, and the outlook becomes clear as, well, crude oil.