Market participants have been nervous that second-quarter earnings reports might be a catalyst for a pullback. The logic is that the market has already discounted an interest rate cut and that the reports will confirm the belief that economic growth is slowing. With the indices extended to the upside, it is a recipe for some corrective action.
There was some uncertainty on Thursday following a very poor report from streaming king, Netflix (NFLX) but then the Fed went to work with some dovish comments later in the day. The prospects of a half-point rate cut at the July meeting jumped sharply, which caused bonds to strengthen, the dollar to drop and equities to rally.
This celebratory action was followed by a very strong earnings report from Microsoft (MSFT) , which blew away earning's estimates, mainly due to stronger-than-expected performance by its cloud offerings.
Not only were the bears wrong about the market fully discounting rate cuts, but they are also wrong about poor earnings -- at least in one case.
The euphoria is cooling off a bit this morning, but the very dovish Fed is going to keep a bid under this market. Those that are looking for some sort of major top to form will have to step aside and wait some more. The old adage about not fighting the Fed is very obviously still in play.
Many of the bears broadcast their frustrations by being highly critical of the Fed. They claim that the policy moves are ill-conceived, dangerous and will lead to far greater pain down the road.
Perhaps that is true, but it is of no help in navigating the current market. This is a market that can't get enough of dovish central bankers and it never seems to fully price in the anticipated rate cuts. Maybe when the cuts actually take place we will see a different reaction, but currently, there is no inclination to fight the Fed.
While the trend is up and there is generally bullish sentiment, this is not an easy market. The biggest problem has been low volume and muted volatility. Despite quite a few major headlines, there aren't strong emotions right now. The Fed evokes some response but many stocks are drifting around listlessly and the pockets of action are narrow.
I'll be watching to see how well the indices hold on to their early gains. There already are some pullbacks as folks worry that maybe the Fed will only cut rates a quarter-point in July.