The market forgot all its recent worries on Tuesday when Fed Chair Jerome Powell signaled that the Fed was ready to move quickly to cut interest rates if the economy shows any signs of weakness due to trade issues. With inflation still well below target levels, the Fed has plenty of room for several rate cuts.
The indices were oversold after wrestling with the surprise news on Mexican tariffs and the antitrust moves against the FAANG names, so it didn't take much to create a stampede of buying when Powell spoke on Tuesday morning in Chicago. Powell was not overtly dovish, but he made it clear that there was no great obstacle to rate cuts if the numbers continue to show weakness. He even mentioned that there were indications of an impending recession.
Mexican officials are meeting with VP Mike Pence in Washington today in a last-ditch effort to convince the Trump administration that it is making a serous effort to stop the flow of immigrants to the border. President Trump signaled his resolve in the matter, although political opposition is strong.
Market players will be watching for news out of Washington today and will be highly sensitive to any indication of progress. Many market players believe it is unlikely that Mexican tariffs will go into effect, so that expectation will be the key to short-term movement from here.
The rally on Tuesday was the second largest of the year. The biggest move was back in early January and was also triggered by dovishness from Jerome Powell. That spike led to a protracted uptrend and market players are hopeful that the current spike will also led to sustained upside.
Technical conditions are different at this point, but a rally like we saw on Tuesday is a good start to a shift in market trend. The key now is follow through -- and there is quite a bit of potential news flow pending that will impact whether that occurs or not.
The market has had a tendency to build on the sort of strength we saw on Tuesday, and early indications this morning are promising. The bears, however, will point out that there has been no major change in the recent negative narrative. China trade is still far from resolved, economic data is weakening, the FAANG antitrust pursuit is just starting and Mexican tariffs are still a possibility.
The market loves to love the Fed, and that is what we are running on right now, but there is some major headline risk that needs to be overcome to push the indices back into a sustained uptrend.