The major stock indexes started the week in the plus column, ahead of this week’s Federal Open Market Committee’s (FOMC) meeting.
Monday’s session was on the volatile side, with stocks crossing above and below the breakeven mark several times throughout the day, but closing firmly in the green. The Dow Jones Industrial Average gained 197 points (0.6%), the S&P 500 moved up 26 points (0.7%), and the NASDAQ advanced 86 points (0.8%). Nearly all of the major market sectors closed well into positive territory, with the biggest gains posted by materials (1.6%). Consumer discretionary, industrials, and utilities also had a strong day, all rising 1.3%. On the negative side, healthcare issues lost about half a percentage point.
The old Wall Street adage of “don’t fight the Fed” has held true so far this year. With inflation running at about four times its target rate of 2%, the Federal Reserve has been raising its overnight lending rate at a rapid clip in order to tame rising prices. Yields on fixed-income securities have also gone up, making stocks increasingly less appealing.
Looking back at an extreme example from the history books, when inflation was running at a double-digit pace in the early 1980s, the Fed funds effective rate briefly catapulted to over 19% in June of 1981. With comparatively low-risk money-market funds offering nearly as much, it came as no surprise that stocks fell out of favor. That same month, the S&P 500 index dropped to a level not seen in 26 years.
Fortunately, we are currently nowhere near those extremes. However, yields on 10-year Treasuries topped 3.5% yesterday, which was the first time they reached that level in 11 years.
As it stands now, the consensus is calling for the Fed to announce a third-straight 0.75 percentage increase when it wraps up its two-day meeting this Wednesday. With its stated commitment to fighting inflation, further increases at the next two meetings in November and December are almost a certainty.
What market bulls are currently looking for are signs that the Fed can at least start making smaller rate hikes, with the hope that, perhaps by some time next year, it will eventually start bringing interest rates back down. Until then, stock prices are likely going to remain under downward pressure.
As we head toward today’s opening bell, U.S. stock futures, which had been pointing toward a positive start, have turned negative. Asian markets were up in overnight trading, but stocks in Europe are currently well into the red. Meanwhile, oil futures are up slightly, at about 85.75 a barrel.
While the Federal Reserve will be commanding most of the market’s attention this week, this morning’s report on housing starts for August came in higher than expected. The seasonally adjusted annual rate (SAAR) increased 12.2%, to 1.575 million. Meanwhile, building permits, which are a more forward looking indicator fell 10%, to 1.517 million, versus a consensus of 1.621 million. Wednesday brings existing home sales for August, where a small downtick is expected, to a seasonally adjusted annual rate of around 4.7 million. On Thursday we get the latest figures on initial and continuing jobless claims, as well as the leading economic indicators for August.
– Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
