Will Brexit/Fed's Hyper-Dovish Shift Push Stocks Over The Top?

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Includes: SPY, VTI
by: Chris Ciovacco

Summary

The Fed shifted their outlook on the long-term path of interest rates last week.

Is this shift significant or just noise?

The results of a one-two punch would be telling.

A Shift In Interest Rate Guidance

The Fed radically altered their outlook for interest rates last week, something that may have a significant impact on the stock market in the coming months. Keeping in mind the Fed's shift in early February helped spark the current rally in stocks, last week's developments improve the odds of the S&P 500 (NYSEARCA:SPY) breaking out to new highs. From The Wall Street Journal:

"Wednesday's moves marked a stark reversal from just a few weeks ago, when several Fed officials, including Chairwoman Janet Yellen, dropped strong hints they might raise rates in June or July. Instead, she emphasized the central bank's uncertainty about when they'll act and where rates are headed in 2018 and beyond."

Fed Guidance Links

It is probably best to watch the video first, then come back and explore these links in the context of the chart above.

Point A: Four Rate Hikes In 2016
Point B: Little To No Hikes In 2016
Point C: June Hike Firmly On The Table
Point D: Yellen's New Normal
Point E: One Hike In Next 30 Months

Video Explains Why This Week's Shift Is Important For Stocks, Bonds, And Commodities

This week's stock market (NYSEARCA:VTI) video helps us understand why the Fed's new stance calls for flexibility, as well as, risk management contingency planning.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Yellen's New Normal

In last week's press conference, Janet Yellen described the current slow-growth environment as the "new normal", which is a significantly different narrative than the one the Fed has been promoting in recent years. From The Wall Street Journal:

The combination of relatively stable economic projections and a lower interest-rate outlook suggests officials are coming to the conclusion that the economy simply can't bear very high interest rates, even to achieve the mediocre growth and low inflation officials have in mind. Ms. Yellen previously said she believed temporary headwinds were holding back the economy. She conceded Wednesday that such drags, such as slow productivity growth, might persist.

Brexit And The Fed

Hypothetically, under the U.K. stays in the European Union scenario, the markets would have two bullish stories to rally around (Fed and Brexit). If the one-two punch comes after the June 23 votes are counted and stocks fail to break out of their recent malaise, it would be very concerning for the markets and the economic outlook. We will learn something either way. Ballots, time, and price will tell.

Disclosure: I am/we are long SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.