After The Close
The bulls regained control of trading early on Wednesday, at least as it related to the major large-cap indexes, before a late-day bout of selling erased most of the gains for a time. Indeed, while market breadth favored neither advancing nor declining shares, the Dow Jones Industrial Average, S&P 500, and NASDAQ 100 each spent the first half of the session in positive territory. The first grouping was the sturdiest earner, while the other two indexes slipped back to their respective breakeven marks (or lower) in response to the Federal Reserve’s announcement of an unchanged interest-rate policy. The Dow was supported by shares of Boeing (BA – Free Boeing Stock Report), which ticked higher following the aerospace giant’s solid fourth-quarter earnings release.
In addition to a plethora earnings reports from Corporate America, which have generally been stronger than anticipated, the central bank’s unchanged monetary policy influenced the session. More specifically, the Fed expects that inflationary pressures will rise throughout 2018. While we had previously expected two or three interest-rate increases this year, the recent tone suggests as many as four may be in the cards. Accordingly, still-elevated equity valuations returned some value on the prospect of higher rates.
Looking at the market sectors, nearly all of the industry groupings slipped temporarily into the red amidst the mid-afternoon selloff. Healthcare stocks were today’s worst performing group, as that sector continues to grapple with yesterday’s announcement that the heads of JPMorgan Chase (JPM – Free JPMorgan Stock Report), Amazon.com (AMZN), and Berkshire Hathaway (BRK.B) were mulling a joint entry into the market, as well as the renewed prospect of a potential government referendum on drug prices. Meanwhile, U.S. crude oil closed the month of January 7% higher, with traders looking past rises in domestic stockpiles in favor of optimism related to the near-term demand environment.
As the closing bell neared, however, the large-cap indexes exhibited some rejuvenated momentum that lifted each of them into positive territory. Overall, it was a strong month for equities. Looking forward, earnings and policy developments from Washington, as well as the scheduled updates from the Fed, will be the dominant factors in trading. Stay tuned.
– Robert Harrington
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell
January will come to an end shortly, and save for the last two days, it has been a most welcoming month for the bulls, as the major equity averages, and the stock market, in general, have followed a steady path higher. However, for this latest brief span, it has been anything but smooth sailing for the bulls, who have taken a major pounding. On Monday, the Dow Jones Industrial Average, under pressure all day, lost 177 points. Then, yesterday, stocks retreated from the opening bell, only more so. Indeed, as we ended the morning in New York, that 30-stock composite was off by more than 300 points.
Things only got worse as we moved into the afternoon, with the Dow's retreat surpassing 400 points for a time later on in the day. That composite was the worst performer, easily outdistancing the losses on the S&P 500 Index and the NASDAQ. A major reversal in some key blue chip components led the way lower. As was the case on Monday, suddenly higher Treasury yields were a big factor in the reversal. Among the big Dow losers was UnitedHealth Group (UNH – Free UnitedHealth Stock Report). In all, the drop in the Dow was the largest such setback since last spring.
Of course, it was not just the Dow that took it on the chin, as the Federal Reserve got together to hold the first day of its two-day FOMC meeting. Fears of a more aggressive, or hawkish, Fed interest-rate stance are gaining some followers on Wall Street, as the U.S. economy continues to advance rather impressively. In fact, even last week's somewhat disappointing 2.6% rate of increase in the nation's gross domestic product for the fourth quarter, was held in check by an inventory drawdown. Expectations are that such stockpiles will be rebuilt at some point in the near future, and that would figure to strength GDP matchups.
Meanwhile few pundits expect today's FOMC meeting to lead to an interest-rate hike. In fact, expectations for such an increase are only about 5%. The consensus view is that the Fed will vote to raise rates three times this year, although some now suggest that we could get four to five such increases, especially if inflation continues to tick higher. We do not now look for such an aggressive posture. Looking back at the past two days, our feeling is that we are experiencing some overdue and perhaps constructive selling after an uninterrupted push higher by equities over the past number of months.
Elsewhere, on the economic front, the Conference Board reported that its monthly survey on consumer confidence had risen to 125.4 in January, as more Americans are coming to expect the strong economic comeback over the last nine months of 2017 to continue in the new year. Early data issuances suggest that this may be the case, though there recently has been some choppiness. In any event, the bears have, at least for the time being, at least, retaken the reins. How far this retreat goes may be gauged by what the Fed does today--and especially what it says about upcoming monetary policy in its accompanying monetary statement.
The stock market, meantime, remained mired in a deep slump into the close, with rising Treasury yields--the return on the 10-year Treasury note jumped to 2.73% yesterday--providing no impetus to reverse the equity market's downtrend. At the close, the Dow was off by 363 points; the S&P 500 was lower by 31 points; and the NASDAQ was in the red by 64 points. In all, the Dow's 1.37% setback led the way lower. Looking ahead now to a new day, we see that stocks were trading lower overnight in Asia, while in Europe, the bourses are moving in a more mixed pattern. Elsewhere, Treasury yields are down slightly to 2.71% and U.S. equity futures are tracking nicely higher.
— Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
