After the Close
The majority of U.S. equities traded higher on Thursday, one day after the Federal Reserve announced the first interest-rate increase in a year. The major indices mirrored each other for most of the day, registering intraday peaks late in the morning and slipping closer to the breakeven level around 2 P.M. EST on the East Coast. But, the bulls reawakened as we neared the final hour of trading, helping to recoup some of the lost value from the midday hours. Sentiment was particularly strong amongst the mid- and- small-cap issues.
In its announcement, the central bank also laid out its plan to implement hikes throughout the next few years. Chair Janet Yellen indicated that it is planning three separate federal funds increases next year. This is the most direct the Fed has been regarding its monetary policy in some time, and investors have accordingly responded to the clarity with optimism. This morning’s unemployment update from the Labor Department supported the move to gradually elevate the rate. Last week saw jobless claims fall by 4,000, pointing once more to a steadily improving economy.
The Fed’s decision helped the financials sector lead the market today. In addition to the rate hike, these stocks also expect to benefit greatly from President-elect Trump’s promises to relax regulations and lower the corporate tax rate. To be sure, there was some sector rotation at play, evidenced by the aggregate decline in the basic materials and consumer cyclicals industries. The groupings have been among the biggest beneficiaries of Mr. Trump’s proposed policies, so we suspect some investors are closing their positions after reaping the rewards of the post-election rally.
Turning to oil, it appears that the market is still confident that OPEC and the rest of the world’s producers can strike an accord to limit output. Led by Russia, the non-OPEC consortium is expected to agree to the oil cartel’s 1.8 billion per-day cut. While a strong dollar stemming from the Fed announcement hampered growth earlier in the day, mounting optimism that the global oversupply will be addressed in the short term has helped the per-barrel price of U.S. crude oil to pare losses $0.14 as the closing bell neared.
So, now that the Fed has made its move, we will look to see if the post-Trump optimism on the market persists. Though the pro-growth initiatives, aimed at infrastructure, regulation, and taxation, ought to continue to benefit certain sectors, the newly tightened monetary policy ought to rein in some of the earnings over the past month and change of trading. Still, the looming Christmas holidays could very well bring a further Santa Clause rally and push averages higher. Will we see Dow 20,000 before then? Stay tuned. – Robert Harrington
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Mid-Day Update - 11:40 AM EST
The major U.S. equity indexes, which sold off modestly yesterday after the Federal Reserve announced at 2:00 P.M. (EST) that it opted to raise short-term interest rates by a quarter of a percentage point, are rebounding strongly this morning. Indeed, the Dow Jones Industrial Average, the NASDAQ, and the broader S&P 500 Index have thus far retraced the prior session’s setback, and then some, as the Trump-inspired rally continues on Wall Street. It is now looking like the major indexes, after not selling off much on the monetary tightening news, may now be looking at one of those typical year-end Santa Claus rallies.
What the Federal Reserve’s decision to tighten the monetary reins has done is prompted some sector rotation among the 10 major equity groups. Not surprisingly, the higher-yielding equities are not doing as well as some of the economically driven groups on a relative basis. The central bank’s decision to increase fixed-income rates will probably make them less attractive to income-oriented investors in the coming months. Conversely, the stocks of the financial companies, particularly the banks, are faring very well on hopes that the recent spike in bond yields, as well as thoughts that the Fed will continue on the monetary tightening path in 2017, will help profits at the lending institutions. Investors should also note that the higher dollar, which rose after the Fed’s decision yesterday, is hurting the commodities stocks, with some selling seen today in the basic materials category.
In addition to thoughts that the incoming Trump Administration will be business friendly, with the promise of significant corporate tax cuts and roll backs in regulations, the market is getting a boost from a strengthening U.S. economy. In recent months, the business has seen growth in manufacturing and nonmanufacturing activity, decent gains in employment, strength in consumer confidence and housing, and an increase in personal incomes. This combination is giving investors an impetus to buy U.S. equities, despite the possibility of the central bank embarking on a period of monetary tightening. The consensus among economists is that we may now see three or more interest-rate hikes next year.
On a day that was light on major economic news, we did get a notable reading on the U.S. homebuilding industry, which is an important cog in the nation’s economic output. Specifically, The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) jumped to 70, the highest level since July 2005; 50 is the dividing line between positive and negative sentiment. In its first reading since the Presidential election, the index of homebuilder confidence spiked seven points, marking its largest one-month increase in 20 years. It appears that builders are hopeful that President-elect Trump will follow through on his pledge to cut the strict regulations that are hurting small businesses and housing affordability. Investors should also note that the Labor Department reported this morning that the Consumer Price Index increased 0.2% on a seasonally adjusted basis in November.
Meantime, as we approach the second half of today’s session, we don’t see much in the headlines to slow the bulls down this afternoon, as the post-election rally appears to be morphing into one of those typical year-end Santa Claus rallies. Stay tuned. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before the Bell
Wall Street soared into yesterday's middle-of-the-week session on an emotional high. After all, the Dow Jones Industrial Average, a modest gainer on Monday and a bigger winner on Tuesday, had come within a whisker of 20,000 on this latter day amid all the fanfare that exciting event likely would engender. However, yesterday, while the eyes of Wall Street were still on Dow 20,000 and to a lesser degree on NASDAQ 5,500, the gaze was more assuredly on the Federal Reserve, which was wrapping up its two-day FOMC meeting.
The market, with all of this going on and still in the grip of its post-election melt-up, started the latest session on a mixed note, with the Dow seeing some profit taking and the NASDAQ, a relative laggard this year, attempting to extend its own winning streak. However, neither of those indexes, nor the S&P 500 Index, strayed far from the neutral line as the morning gave way to the afternoon on the East Coast, and as the Fed's 2:00 PM (EDT) monetary decision was still pending.
Of course, there was other news for traders and investors to digest on the opening half of this eventful session. On point, the government had early in the day released a trio of key economic reports--all before the stock market had begun the day's festivities. To recap, the Commerce Department issued data showing that retail spending had barely advanced in November, gaining a scant 0.1% for the month, a third of the expectation, and well down from the revised 0.6% increase tabulated in October. Weakness in car sales and a few other components weighed down results here.
At the same time, the Labor Department reported that the Producer Price Index had jumped a larger-than-expected 0.4% last month. That was the biggest rise since prices rose by 0.5% in June. Wholesale inflation, by comparison, had shown no change in October. The monthly gain was largely led by food, with energy costs actually moving lower. Backing out the volatile food and energy components, to get the so-called core PPI, we see that prices rose just 0.2%. So, there were likely few material concerns just yet for the Fed.
Then, some 45 minutes later, Commerce weighed in with a weak reading on industrial production, with that metric easing back by 0.4% in November principally on a downturn in utility usage due, we sense, to the un-seasonally warm early fall weather. Manufacturing, the largest of the three industrial categories measured (along with mining and utilities), was off just 0.1%. So, there was no big news that would be a market-moving item here. Thus, stocks continued to weave in and out of the black, as the Street awaited the Fed's announcement in the mid-afternoon. In fact, as the witching hour arrived, the averages were little changed.
Then, at the appointed time, the central bank did the expected and voted--after a year's hiatus--to raise short-term interest rates by 25 basis points. Wall Street's initial take was positive, and stocks rallied in the first minutes after the announcement. But shortly thereafter, the profit takers arrived and this extended market encountered some moderate selling, with the Dow at one point falling back by more than 150 points, before seeing some half-hearted buying for a time late in the day, before even that attempt failed. It was a case, we sense, of buy on the rumor and sell on the news.
The market then remained lower into the close, with the aforementioned late buying failing to move the needle all that much, so that by the close some moderate, but overdue, profit taking had set in, with the Dow ending matters off by 119 points, pushing that index just below 19,800. The S&P 500 Index gave back 18 points and the NASDAQ eased by 27 points. Meanwhile, the small-cap Russell 2000 Composite, the major small-cap benchmark, fell back by 17 points, after stealthy gains during the post-election market surge.
Looking out at things this morning, we see that stocks were mostly lower in Asia overnight, but they are higher in Europe thus far this morning, while our futures are pointing to a modest opening gain at this hour. Mostly higher, as well, is oil, after some retracement yesterday. More ominously, however, interest rates are rising again, with the yield on the benchmark 10-year Treasury note climbing past 2.60% this morning. That key metric certainly bears watching. – Harvey S. Katz
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
