Then Again…Market Reverses Engines After Initial Fed Pop, With Most Sectors Hit
- A day after Fed pledges long-term low rates, Wall Street has a rough start
- Selling in pre-market has been across the board, in both Tech and “re-opening” stocks
- Initial jobless claims close to expectations, but not down much from week ago
It looks like second thoughts might be creeping in a day after the Fed meeting.
Stocks initially popped yesterday following the Fed’s pledge to keep rates near zero through 2023. A skid began later and selling picked up ahead of the opening bell this morning. Just about every sector across the board got slammed early on, from Tech to vaccine-related stocks to airlines.
It’s never easy to sum up sentiment exactly, but it’s possible investors are thinking about the ramifications of what the Fed said. If Fed officials almost unanimously believe rates need to stay near zero for the next three years, that doesn’t exactly sound like they’re expecting much of an economic recovery.
In some ways, the market is like a spoiled child. Nothing is ever enough. The Fed pledged a long, smooth runway for the economy, but maybe investors had been hoping for it to add some new proactive steps that would provide even more monetary stimulus. It’s almost like when a company meets earnings expectations but then sees its stock fall because it didn’t meet a “whisper number” that was out there among some investors.
A little of the early weakness could have nothing to do with the Fed. Instead, it might be related to media reports that the Senate doesn’t seem ready to jumpstart stimulus legislation after the administration sounded a positive tone yesterday (see more below). It feels like there’s lip service being paid, but at the end of the day, nothing got done.
Anyone hoping weekly initial jobless claims this morning could provide a lift might be disappointed. The 860,000 number wasn’t too bad by today’s standards, but it was above the Wall Street consensus estimate of 830,000, according to research firm Briefing.com. It’s down just a little from 884,000 the prior week. It would be great to see some dramatic moves lower in this particular report, but it hasn’t been happening. To some, that might be a sign that the economy isn’t recovering as quickly as many had hoped.
If you’re wondering where technical support might show up, it’s worth noting that the S&P 500 Index (SPX) has a 50-day moving average near 3335, and futures were flirting with that area before the open. There’s no guarantee of finding buyers at that level, but it did hold relatively well on tests earlier this month. The Nasdaq 100 futures (/NQ) saw a double bottom last week at the 10930 level, so any move below 11000 in the NDX might look for support around that level.
But again, the Nasdaq (COMP) rallied so much—and so quickly—off the March lows, from the mid-6000s to over 12000 earlier this month, there’s less technical “muscle memory” at any of these levels.
Another thing to consider watching today is the Cboe Volatility Index (VIX). It would be positive to see it stay below 30.
More Thoughts on the Fed
The Fed made some big promises about the future path of rates yesterday, and it’s anyone’s guess if they can keep them. Just looking ahead a quarter or two into the economy is hard enough for most economists, let alone three years.
It’s interesting looking at the Fed’s inflation projections in the context of what they said yesterday, because they don’t predict inflation to get above 2% at any time in the next three years. There’s some aspect here, arguably, of trying to talk the economy into inflation, and of course the Fed has thrown every monetary policy it can at the problem. Whether it can use the power of its voice to influence actual consumer and business decisions remains to be seen.
Fed Chairman Jerome Powell said he’s comfortable with inflation getting above 2% at times, but inflation didn’t get above 2% very often even in the years leading up to the pandemic. Energy prices have been low basically since 2015,, and the trade war with China might also have slowed economic growth and demand. All this tends to weigh on inflation.
Why should investors care if inflation gets back to 2% or above? Well, first of all, it would probably indicate an economy performing well enough that demand starts to outstrip supply for some items. Companies would then have to add workers and build new plants to meet demand.
Also, if you own Financial stocks it would be nice to see inflation come back. Interestingly enough, the 10-year Treasury yield rose after the Fed announcement late yesterday and was pushing the 0.7% mark. It’s just one day, not a trend, and it fell back to 0.66% this morning. If yields do begin moving higher from here, it might be a sign that the market doesn’t believe the Fed can come through on its “low rates for years” pledge. Higher yields tend to help banks’ bottom lines.
Fiscal Stimulus Daydreams Return
It’s kind of ironic that after Powell beat the drums for more fiscal stimulus since around May, he finally appeared to get some progress the very day of the Fed meeting. It’s still just talk for now, but back at midday yesterday the “reopening” segments of the market appeared to get a nice charge out of headlines that the administration was apparently sounding more optimistic.
That could be a preview, if you think about it, of how the market might respond if and when actual stimulus gets passed. It could have less impact on high-flying Tech stocks like cloud-computer firms and chip-makers, and more on shares of companies in the entertainment, sports, hotel, restaurant, and airline industries. Those are the ones where people might spend their extra money if they have it, especially if the reopening trend continues. United Airlines (UAL) and Walt Disney (DIS) both climbed yesterday.
It could also help small-cap stocks, which are more closely tied to the domestic economy. The Russell 2000 Index (RUT) of small-caps was up 1.6% at times yesterday and outpaced all other indices. That’s arguably not a coincidence. The RUT has a big exposure to regional banks, and a strong stimulus could conceivably mean more business for those companies as small business-people take out loans to do new projects. A stimulus might have more of a Main Street impact, instead of just helping “Chip Street,” so to speak.
Rare Day for Energy: The staggering Energy sector got a huge dose of support Wednesday, rising 4%. A big rally in crude certainly seemed to be what the doctor ordered, but don’t forget the Fed’s commitment to easy monetary policy, which historically tends to push down the dollar. Crude prices typically rise when the dollar falls. Hopes for long-term accommodative monetary policy also might have played a role in Energy’s gains, along with a hurricane in the Gulf of Mexico.
The dollar index is hanging in there for now, around the 93 area. It’s definitely a nice tailwind for many U.S. companies with business overseas to have the dollar down from above 100 earlier this year and below what had been a long-term range between 95 and 98. It’s about the time when analysts start putting out Q3 earnings estimates, and they’ll likely be factoring the lower greenback into their projections for profits.
But What About the Fed? There’s a “hole card” for investors that always seems to come up if you mention the heavy premium of growth to value stocks, or historically high valuations. That card, of course, is the Fed’s low-rate policy, now apparently extended through 2023. It used to be that rallies got held in check, to some degree, by worries that an economy becoming too hot would face rate increases. Now, the Fed says it’s not even “thinking about” thinking about higher rates for a long time to come as it tries to make progress against high unemployment. So the takeaway for some investors seems to be keep buying the dips, knowing there’s no Fed threat to the party.
There’s danger with this logic, though. At the end of the day, earnings eventually matter, and we saw that during Q2 earnings season when companies failing to meet lowered expectations got punished. The same could happen in October when reporting time resumes. Also, the virus won’t last forever. Hope that an effective vaccine can hit the market sooner rather than later is probably universal, but if it does come out, that could have the Fed start rethinking if it needs to stay in “crisis mode.” There’s no way to know exactly when this will happen and no one should try to time the market. However, if you are going in at current price levels (or any time, really), it might make sense to do it in smaller steps rather than all at once.
Watch for Witches: Don’t forget that tomorrow is “quadruple witching,” the Friday each quarter when contracts for stock index futures, stock index options, stock options, and single-stock futures all expire.
While for various reasons quadruple witching doesn’t necessarily have the volatility risk it used to, it still makes sense to be aware of it. At every expiration, you should have a heightened sense that there might be more movement at the open or close as people unwind baskets of stocks or futures. On quadruple witching day, you have to be more aware.
Volatility, however, hasn’t been too big a factor the last few days. The Cboe Volatility Index (VIX) remains elevated compared with historical levels, but at below 30, it’s not near any metric that would scare the children. It’s down from highs near 40 earlier this month during that quick Tech sector correction.
TD Ameritrade® commentary for educational purposes only. Member SIPC.