24-Hour Crystal Ball: Dow Hits All Time High Wednesday

Tomorrow, the Federal Reserve will release a statement following its May policy meeting and most Fed-watchers see this as some kind of inflection point or other.  If they raise the fed funds rate another quarter point (the 16th consecutive such increase), it will take the key rate up to an even 5%.

A couple weeks ago, before the most recent wave of economic data came out, economists were not only considering it a foregone conclusion that we'd tip five percent in May, but that we'd almost assuredly hit 5.25% if not higher before Bernanke decides to pause.  I've been watching and reading nearly everything Bernanke's been saying and I never saw or heard anything that suggested he would be so hawkish.  Since January, I've been saying I thought 4.75% would be where the Fed would first halt its long hiking campaign.  And the Fed Chairman's increasingly dovish (though always with the "data-drive" caveat) if not hinting toward accommodative language seemed, if taken at face value, to suggest that we would only move up to 5% in May if then unseen inflationary pressures emerged.

Some recent economic news has buoyed analysts' hopes that the campaign would indeed come to an earlier end; many now believe tomorrow's hike will indeed be the last in the streak and that the statement will include strong hints about a pause next time around.  Some however, still think the end is less in sight.

For my money, I still hold that there's a reasonable chance that we'll hold short at 4.75%.  I wouldn't bet even money on it, but it wouldn't surprise me.  At hawkishest, I expect a quarter point hike, accompanied by uncommonly explicit language forecasting a pause at the next meeting (with the obligatory caveats).

Since even this outcome would be at the far bullish (for equities) end of the range of analysts' expectations, when this happens, I expect the equity market to go a touch batty.  Not only will it mark a key inflection point toward monetary accommodation, but the likely resulting pop in stock valuations would float the Dow right up against that all time high of 11,723 (less than a hundred points from its current level).  Add to that the fact that today's reasonable blue chip gains came despite a $1 boost in oil prices, thanks to strong corporate earnings.  If oil does a little mean reversion, it could provide yet another tailwind to the broad market during tomorrow's trading, convincingly piercing through to a new all time high.

Of course, you shouldn't take any of this as investment advice or a recommendation because it's not.  It's merely a thoroughly documented teeing up of a grand I-told-you-so.

For style points, here are some related Foxy predictions. The new all-time high will be the lead story on Your World with Neil Cavuto, who will discuss the resilience and robustness of the American economy; on the Big Story with John Gibson who will wonder if we're somehow being scammed by traders; on Special Report with Brit Hume, who will discuss with the Panel to what degree we can credit the 2003 investment income tax cuts for this, what it means for the midterm elections, and whether this will finally wake the American people up to the strength of our economy; and on Bill O'Reilly who will find dismiss the story in its entirety and proceed to villainize the oil companies.