Market Reaction to Rate Hike Suggests Comfort with Inflation Containment

Market reaction to recent rate hike suggests investors are comfortable with inflation containment without derailing economic growth, says Cabot Small-Cap Confidential's Tyler Laundon.

Last week's 25 basis point interest rate increase by the Federal Reserve was met with a surprising market response. Instead of pressuring stocks, particularly smaller companies sensitive to borrowing costs, the Fed's move was welcomed by investors. The S&P 500 has gained 2.8%, the Nasdaq has rallied 5.2%, and the iShares Semiconductor ETF (SOXX) has surged 11.4% since the Fed decision.

The jump in crude oil above $100 and the surge in the 10-year Treasury yield toward 5% had created concerns that inflation expectations could become unanchored, requiring more aggressive action from the Fed later. However, one or two modest rate hikes may be preferable to allowing inflation, oil prices, and yields to continue climbing unchecked.

Small caps have not been market leaders since the Fed meeting, with the S&P 600 SmallCap Index slipping 0.2%. Despite this, their performance remains compelling, with a year-to-date gain of 15.9% ahead of the S&P 500's 13.4%.