The Dow Jones Industrial Average looks ready to set a new all time high of 17,000 after continued follow-through since the Fed meeting last week. Market participants where rationally exuberant after Janet Yellen kept on course and didn’t rock the boat with higher quantitative easing. As expected, the FOMC kept the rates constant and trimmed QE bond buying by 10 billion which sent markets roaring higher with the S&P 500 hitting new highs and small caps continuing to breakout.
Inflation bugs were temporarily disappointed, but the economy isn’t improving at a growth rate that would make rising prices a problem and there is no need for the Fed to signal additional efforts to trim a marginally growing economy. Many inflation watchers have been wrong for the last 7 years since the Great Recession began and it would take two consecutive quarters or more of exponential growth to make the economy susceptible to pressures from rising core prices.
The IMF decreased its forecast for U.S. economic growth by 0.8 percentage points to 2% last week and this is more evidence that the economy isn’t in expansion mode with risks to the downside still prevalent. Several months of political partisan bickering have now yielded the continue slow growth warned about here based on almost endless possible government shutdowns and low certainty is now having its medium run impact on the economy.
Continue to watch small caps for any signs of increased investor sentiment and ignore volatility which hasn’t been a useful indicator over the last few months. A sharp change in sentiment is possible but the path of least resistance seems to be upward in the short-run. Investors looking for growth have not yet abandoned small caps or tech which is a positive sign for bulls. The Dow could go as high as 18,000 barring a steep correction. Watch the Dow Transports in the short-term.