The Federal Reserve is out of the way. Now investors can get back to worrying about everything else that has put a lid on equity prices for more than a year.
To review, those include tumbling earnings, rising valuations and a U.S. presidential race. And while none are keeping traders from pushing up stocks after Wednesday's decision to hold the policy rate unchanged for a sixth meeting, money managers predict it won't take long for the celebration to die down.
For now, bulls can take heart. The S&P 500 index has surged after Janet Yellen's Fed joined the Bank of Japan in affirming its commitment to holding rate policy steady.
"To add to stock holdings here would be betting on a lot of unknowns, and that can be painful in the long run," said Tom Mangan, senior vice-president of James Investment Research Inc. in Xenia, Ohio, which oversees about $6.5-billion (U.S.). "I don't see much of a rationale for stocks to continue to get more and more expensive."
Policy makers said the case for higher rates has strengthened but decided "to wait for further evidence of continued progress" toward the central bank's objectives. Three officials voted against the decision, up from one at the last meeting, and the Fed signalled it's still prepared to raise rates in December.
Their inaction leaves investors on the same ground they occupied in August, with evidence of a thriving U.S. labour market diluted by weakening retail sales and industrial production, as well as drops in sentiment at service companies and manufacturers. S&P 500 profits are forecast to drop 1.4 per cent in the July-September period, the sixth straight quarterly retreat, while the index's price-to-earnings ratio of 20 is one of the highest since 2003.
"Valuations and earnings are what's going to start to matter, as long as the Fed is on the sidelines watching," said Randy Warren, who manages more than $100-million at Exton, Penn.-based Warren Financial Service & Associates Inc. "When those P/E ratios start to come down because earnings start to rise, things will start to look more stable."
At the same time, while concern about earnings and valuations and even presidential politics have been a barrier to gains, they've repeatedly failed to kill a bull market that since March, 2009, has restored $14-trillion to U.S. equity prices. While economic growth has fallen short of forecasts, gross domestic product continues to sputter along, estimated at 1.5 per cent in 2016 according to a Bloomberg survey of economists.
The S&P 500 rallied for five straight months starting in March when it soared 6.6 per cent to erase the worst start to a year on record.
"Will the markets race up to a new high again? We certainly could see that. I don't see a lot of downside here, unless there's a real scare about what happens in the election," said Timothy Ghriskey, who helps manage $1.5-billion as chief investment officer at Solaris Asset Management LLC in New York. "The Fed always says they're not political, but I think in this case maybe they are, until they see what happens."
While the Fed standing pat removed the most visible threat to equities, gains Wednesday and Thursday weren't enough to push the S&P 500 above its level on Sept. 8, just before hawkish comments by Boston Fed president Eric Rosengren spurred the biggest sell-off since Britain's vote to quit the European Union. He joined Esther George and Loretta Mester in voting against the decision to hold off in a rate increase, according to the statement.
Odds in futures markets for a tightening this year sit just below 60 per cent after the Fed said the "case for an increase in the federal funds rate has strengthened" in its statement.
"It's meaningful that there were three dissents in the voting. I think it's going to be harder at each subsequent meeting to not do anything," said Walter Todd, who oversees about $1.1-billion as chief investment officer for Greenwood Capital Associates LLC in South Carolina. "As I sit here today I would expect them to want to move in December."