The stock market rally to start this year was built on the Federal Reserve abandoning its plans to continue raising interest rates. The stock market rally in the last month or so may be built on something else: the idea that the Federal Reserve will actually lower interest rates.
The chart below shows the market is currently factoring in a 70% probability for a rate cut in 2019. In other words, the Federal Reserve merely standing pat on rates could now be seen as a negative development. We saw just that after Fed Chairman Powell recently stated that there was neither a strong case to be made to raise or lower rates, and the stock market promptly sold off by more than 1%. What’s clear is that the Federal Reserve will continue to have an outsized impact on the stock market going forward.
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