The stock market soared nearly 3% last week, closing just below previous all-time highs. Investors celebrated the Federal Reserve’s go slower policy on raising interest rates. The central bank’s statements suggested hikes would be fewer, and possibly smaller and later than previously expected, given low inflation and less-than-robust economic U.S. expansion.

The market has blown hot and cold in recent weeks, shifting with perceptions about the timing of the first Fed Fund’s rate hike. When a June move was anticipated, stocks fell, as they did in the previous two weeks. Fed projections were “marked to market,” says David Lefkowitz, senior equity strategist at UBS Wealth Management Research, and the “Goldilocks” scenario pleased investors. The Fed’s median remains above the futures market prediction of about 0.5%.

LAST WEEK, the Dow Jones Industrial Average tacked on 378 points, or 2.1%, to 18127.65, while the Standard & Poor’s 500 index jumped 55 points to 2108.10. The Nasdaq Composite gained 155, or 3.2%, to 5026.42, not far below its high of 5048, set back in 2000.

“The Fed moved the goal posts in a substantial way” and pushed out the timing on rate hikes, says Jonathan Golub, chief U.S. market strategist for RBC Capital Markets. Rates will be lower for longer than the market thought, which is attractive for risk assets like equity, he adds.

It lowered the bar on the unemployment rate needed for a hike, to 5%-5.2%, instead of 5.2% 5.5%, he says. With the rate already 5.5%, the Fed gave itself more wiggle room on timing. It also downgraded its forecasts of U.S. GDP growth to 2.3%-2.7% this year, from 2.6%-2.7%.

Partly behind the Fed’s actions, says Golub, is a quiet desire to contain the dollar, which has risen 25% in the last 10 months and will hurt the profits of U.S. multinationals. That’s something investors will be looking at keenly, and soon. For the near term, however, the market will be in limbo, as first-quarter earnings reports don’t begin for three weeks and the economic data calendar is relatively sparse until then.

Oil’s effect is built in, and the bottom up analyst EPS estimates for the first quarter have stopped going down, a potential salutary influence, Golub notes. Nevertheless, the magnitude of the effect of the rising dollar on earnings is yet to be ascertained and could lead to surprises and volatility.

(Source: Barrons Online)