The Standard & Poor's 500 index ended last week little changed, even after the central bank said on Tuesday that it was leaning toward higher rates as economic expansion threatens to spur inflation.
"Just because the Fed said what they did doesn't mean they'll raise rates," said Howard Kornblue, at Pilgrim Investments. "But even if they do, I don't think it would derail the market." If the Fed was serious about raising rates, the policy-makers would have done that on Tuesday instead of merely announcing their inclination to tighten, he added. "The overall positives in the market are still there: low inflation, low interest rates and strong earnings," he said.
For the week, the Dow Jones Industrial Average lost 0.8 per cent, while the S&P 500 slipped 0.6 per cent and the Nasdaq declined 0.3 per cent. With the first-quarter earnings period over, investors have little news to focus on, an environment that tends to reduce trading volume and increase volatility.
While investors are sceptical that official rates are headed higher, they have been shifting money into small stocks and cyclical shares - those whose fortunes are tied to the economy.
Small stocks, which have lagged those of large companies for years, fared better than big market measures since mid-April. The S&P Smallcap 600 Index gained 2.3 per cent last week, and analysts say the rally is likely to continue.
They owe that success in part to the perception that an improved world economy and a vigilant Fed will help US growth to remain healthy. "If the US economy is going to fall apart, you don't want to own small-cap stocks," said Margaret Doyle, a portfolio manager at US Trust.
The market should be able to move ahead, even if rates move a little higher, money managers said. For much of 1998, rates were 5.5 per cent, 75 basis points above the present level. Still, the S&P 500 rose 29 per cent last year.
"Investors may be looking at an upward bias as a magic bullet that doesn't necessarily need to be shot," said Richard Babson, President of Babson- United Investment Advisors. "The Fed is trying to engineer a soft landing."