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Looking for Catalysts After Rally Above 21,000 As Rate Hike Chatter Persists

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March 2, 2017

(Thursday Market Open) What can the market do for a follow-up after Wednesday’s sharp rally? For the moment, it looks like a mixed open, with little in the way of catalysts other than continued chatter about a possible March rate hike.

It took just 24 sessions and a speech by President Donald Trump to send the Dow Jones Industrial Average ($DJI) up 1,000 points to its first close above 21,000. The first time it closed above 20,000 was on Jan. 25. The index only closed lower in seven of the 24 sessions, and had a 12-session streak of new record highs that ended Tuesday. The 24 session-run was the fastest time between big round numbers since the spring of 1999, when the DJIA rose from 10,000 to 11,000.

Of course don't forget that the S&P 500 (SPX) and Nasdaq continued to join the record setting party taking place on Wall Street. At the same time, bond yields continue to come roaring back, with the 10-year at 2.47% as of this writing.

Trump’s speech seemed to soothe investors after a short period of more defensive trading late last week and earlier this week. Eight of 11 sectors gained more than 1% on Wednesday, and financials and energy rose more than 2%. The market looked rather flat early Thursday as new catalysts seemed lacking.

As we noted yesterday, Trump took a presidential tone and painted a vision. It was a very positive speech, and a unifying one. It still lacked details on economic policy, but the market appears to be overlooking the absence of details due to its generally positive tone. Hopes for a tax cut may continue to provide underlying support even if details remain sparse.

Hawkish words from the Fed, which now appears far more likely to institute a rate hike this month (see below), also may have played a role in the rally. A rate hike now appears to be viewed by many investors as a vote of confidence in the economy, as opposed to the past where it was seen as a potential market derail. The futures market now prices in a 77% chance of a March hike.

Still, there’s no guarantee a quick rate hike is in the cards. Fed Chair Janet Yellen could give more clues tomorrow in her speech, which is scheduled before the Fed goes silent ahead of its March 14-15 meeting. Fed Vice Chairman Stanley Fischer also speaks Friday, and has been known to move the market sometimes with his comments.

The week wraps up today and tomorrow without much economic data news of note. Weekly jobless claims fell to 223,000, a 44-year low, the government reported early Thursday. Next week gets more interesting, with the jobs report coming up a week from Friday. On the Fed front, Cleveland Fed President Loretta Mester speaks tonight.

DJIA

FIGURE 1: MAGIC NUMBER 24?

Is there something magical about the number 24? That’s how many sessions it took the Dow Jones Industrial Average ($DJI), plotted here through Wednesday on the TD Ameritrade thinkorswim® platform, to rise from its first close over 20,000 to its first over 21,000. That ties the record for shortest number of sessions between big round numbers originally set in 1999. Source: Dow Jones & Co. For illustrative purposes only. Past performance does not guarantee future results.

Take a Hike! It may have been the quickest leap in the history of rate hike odds, at least from the perspective of Fed funds futures. Early this week, CME futures predicted about a 35% chance of a Fed rate hike in March. That doubled to 70% early Wednesday and climbed to 77% by early Thursday, meaning the market now leans toward predicting the second Fed rate hike in just four months. That would be the quickest pace of rate hikes since mid-2006, if it actually happens. What was the impetus for this quick jump? There was President Trump’s upbeat speech, as well as New York Fed President William Dudley’s hawkish remarks. Late yesterday, Fed Governor Lael Brainard, who has long been known for her dovish sentiment, said it would be “appropriate soon” to raise rates, according to media reports. There’s also anticipation of Fed Chair Yellen’s speech Friday. The broader market took the higher rate hike odds in stride on Wednesday, with the financial sector leading again. Higher rates can often improve banks’ profit outlooks.

Two Ways to See It: On the one hand, a pending rate hike can often appear to be a speed bump for the markets, simply because such a move by the Fed signals growing concerns about inflation and an attempt to slow the economy’s growth pace. But another way to look at a hike — which seems to be how many investors see things now, judging by stock market action Wednesday — is as an acknowledgement by the Fed that economic growth is indeed strong. The Fed typically doesn’t raise rates when things are going poorly. Recent rate hike periods accompanied strong stock market and economic growth in the late 1990s and mid-2000s. And there certainly have been signs of economic strength recently, including consumer confidence, job creation, retail sales, and Chicago PMI.

That isn’t to say all is fine and dandy if rates rise, because rate hikes often lead to a stronger dollar, which isn’t necessarily good news for multinational companies in the industrial, materials, and info tech sectors. Keep an eye on those sectors if a hike does indeed come through. Also keep an eye on oil, which sometimes stumbles when the dollar goes up.

Auto Incentives Rise: Auto sales were nearly flat in February compared with the same period a year ago. The average incentive hit a record of $3,830 per vehicle sold, as carmakers continue to pay up to gain customers. Among the major automakers, there was a mix of sales increases and decreases last month, with General Motors (GM) posting an increase, and Ford (F) seeing a decline.

Good Trading,
JJ
@TDAJJKinahan

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