Stocks Erase Intraday Losses To Close With Solid Gains  Image: Bigstock Stocks reversed sharp intraday losses yesterday to end with solid gains by the close. Inflation continues to weigh on stocks. Not just because of the burden it puts on the consumer, and therefore the economy (since roughly 70% of GDP is comprised of consumer spending), but also due to uncertainty over what the Fed's response will look like. On Wednesday, 5/4, the Fed concludes their 2-day FOMC meeting and will announce how much they're increasing interest rates, and how aggressive they will be in reducing their record $9 trillion balance sheet. The Fed is widely expected to raise rates by 50 basis points, and announce the beginning of their balance sheet reduction. But traders will also be listening to what the Fed has to say about rate hikes for their next meeting in June. Fed Funds traders have placed a 91% chance that rates will go up by 75 basis points in June. And there's plenty of speculation on what they'll do in July as well. While I understand the angst, I believe the Fed raising rates is a bullish event. Inflation is the biggest threat to the economy right now. And an aggressive move by the Fed will show they are serious about combating inflation. Especially after letting inflation get too high for too long before doing anything about it. Yes, there's some worry that an overly aggressive Fed could slow down the economy too much. Those concerns were magnified last week when Q1 GDP came at -1.4% vs. the consensus for a gain of 1.1%. But the economy is strong. And in spite of last week's headline miss on GDP, the details showed that consumer spending was up 2.7% q/q, which was a faster growth rate than the previous quarter's 2.5%; business investment was up 9.2%; residential investment was up 2.1%; and final sales to private domestic purchasers were up 3.7% vs. last quarter's 2.6%. (It was lower government spending, lower exports, and lower inventories that weighed on the GDP numbers.) In fact, because the economy is so strong, Fed Chair, Jerome Powell believes the economy will "flourish in the face of less accommodative monetary policy." But all eyes will be on Wednesday afternoon's FOMC announcement. In the meantime, we'll get the Factory Orders report, and the Job Openings and Labor Turnover Survey report (or JOLTS for short) this morning. And we'll see if the market can build on yesterday's bullish turnaround and press even higher. See you tomorrow,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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