Why the ASX 200 could hit fresh highs in the next week or two

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index not only finished at an 11-year high today but it closed near the top of its intra-day trading range and on high volume. This party could continue for a while yet.

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Market bulls can rejoice! The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index not only finished at an 11-year high today but it closed near the top of its intra-day trading range and on high volume.

I wasn't expecting good volume behind the 1% rally on Wednesday given this is a holiday-laden period with most investors taking an extended long weekend.

If you are wondering what was behind share market buying spree – it's probably interest rates.

A rate cut next month?

There are increasing number of economists predicting that the Reserve Bank of Australia (RBA) will be forced to cut the official cash rate as early as next month after the weak consumer price index (CPI) reading today.

The Australia and New Zealand Banking Group's (ASX: ANZ) economists are the latest to predict a cut to our record low cash rate next month and is tipping a second cut for August, according to the Australian Financial Review.

Our market rallied harder after the release of the data at 11.30 this morning and held on to gains ahead of tomorrow's ANZAC Day holiday.

Three key things to note

There are a few interesting takeaways from this. The first is that a rate cut next month would be highly unusual as the RBA typically shies away from changing rates during a federal election.

The second noteworthy thing about today's ASX rally is that Australian rate cuts are not priced into the market. This is unlike the US where experts believe a cut by the US Federal Reserve is already factored into US equities and won't push the S&P 500 any higher.

The third key takeaway in my view is that the ASX 200 is likely to rally higher over the next week or two, but we may succumb to "buy the rumour, sell the fact" with our market giving ground should the RBA lower the cash rate from 1.75% to 1.5% on May 7.

Foolish takeaway

You see, cutting the rate next month could prove to be a double-edged sword. Lower rates are good for risk assets, but as I mentioned, a cut during a federal election is unusual. If our central bankers felt compelled to move the rate dial next month, it will signal that things are worse than they appear – otherwise the RBA would wait till June to cut.

It's one of those situations where we should be careful for what we wish for!

But regardless of whether the RBA cuts rates in May, I think income stocks are set to outperform their growth counterparts for the rest of 2019.

Lower rates will make the dividend yields on income stocks look much more attractive, while many growth stocks look fully valued after their strong run, in my opinion.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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