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Stocks Soar—But Is Relief Really On The Way?


Equity markets sent investors smiling into the Memorial Day weekend, thanks to the biggest weekly gains for the S&P 500 (+6.6%) and the Dow Jones Industrial Average (+6.2%) since 2020. The Nasdaq topped both, soaring 6.8% for the week.

Amazingly, much of the credit goes to the Federal Reserve Board—which lately has been far more investors’ tormentor than their cheerleader. But the minutes from the Fed’s last meeting, released last Friday, showed a less-hawkish-than expected Fed that could be looking to “front load” interest rate hikes to tame inflation faster.

This prospect of a friendlier Fed helped turbocharge the equity markets’ rally, particularly the beaten-down consumer discretionary sector. The obvious question: Will it last–or are we looking at a relief rally before markets head south again?

For clues, consider that today’s financial conditions are hovering around their historical average. In other words, while they’ve tightened considerably from the worst of the pandemic, they’re not actually tight yet. And the Fed has made it clear that it is laser-focused on taking decisive steps to achieve tighter financial conditions and get inflation under control.

At Horizon, we believe that until the Fed shifts its attention away from beating inflation and back toward growth and employment, the medium-term risk for equities skews to the downside—even as we may see short-lived rallies here and there.


This commentary is written by Horizon Investments asset management team.

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