After The Close
The U.S. equity markets started the day on a down note and remained in negative territory throughout the session. However, price action for the major indexes remained within a fairly narrow band. For the most part, it appeared that traders and investors continued to digest yesterday’s monetary policy update from the Federal Reserve. Namely, that the lead bank would keep its target rate unchanged for now, but that a quarter-point hike remained on the table before the year was over. It also continued to project three rate increases for next year. The Fed’s more immediate plans, however, call for it to begin unwinding its $4.5 trillion balance sheet starting next month.
At the closing bell, all three of the major indexes ended the session on the negative side of the ledger. The Dow Jones Industrials fell 52 points, ending a nine-day up streak, while the broader S&P 500 Index was off by seven, and the tech-heavy NASDAQ shed 33 points. In terms of sector performance, while most groupings were in the red, the declines were fairly well contained. The largest losses were sustained by consumer non-cyclicals, which shed nearly a full percentage point, and telecommunications issues, which were down a little over half a percentage point. The two exceptions to today’s downdraft were financial and industrial stocks, each of which gained about a quarter percentage point.
Meanwhile, the European bourses put together a generally positive showing, boosted by reports that consumer confidence in the euro zone had reached a 16-year high. France’s CAC-40 and Germany’s DAX both spent the whole of the day in the green, gaining one half and one quarter of a percentage point, respectively. However, London’s FTSE failed to hold onto early gains, and fell short of breakeven with a modest loss.
— Mario Ferro
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
Mid-Day Update - 12:00 PM EDT
Though market breadth was largely even, the major U.S. indexes spent most of Thursday morning in negative territory. Somewhat hawkish sentiment from yesterday’s Federal Reserve decision (discussed below) worked to negate the reaction to an encouraging August reading of key economic indicators from The Conference Board. The 0.4% aggregate increase last month roughly doubled the anticipated rate of growth, and is up from a 0.3% gain in the prior month. Though the report does not fully take into account the recent hurricanes, it does underscore a persistent pace of growth for the economy. Nevertheless, most of the market sectors were down in value this morning.
As was the case yesterday afternoon, traders are ascertaining the possibility that the Federal Reserve will raise rates in December, a prospect that had seemed increasingly unlikely in prior weeks. So, with recent inflation data, and the slow-but-steady rate of economic improvement, the market registered some surprise with the central bank’s slightly hawkish tone coming out of this week’s two-day summit. It plans to begin reducing its hefty $4.5 trillion balance sheet in October, while the chances of a rate hike in December are suddenly more likely. Accordingly, the financial sector is one of the few industry groupings delivering growth today.
Meanwhile, domestic oil prices slipped from their elevated levels before climbing back toward the breakeven line by the noon hour. Traders in the commodity market appear to be showing signs of caution ahead of tomorrow’s OPEC meeting in Vienna. The gathering will also include ministers from Russia and other oil producing nations. On the docket will be a discussion on extended production cuts, which could see the 1.8 million per-day level augmented to speed up the tightening of the global market.
So, looking forward, we suspect the tug-of-war between the bears and bulls will continue in the near term. Late September typically sees some profit taking ahead of third-quarter earnings season, so we would not be surprised to see the still-historic levels of the large-cap indexes challenged through the end of the month.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The U.S. equity market delivered a mixed showing yesterday. The day’s biggest news came at 2:00 P.M. (EDT) when the Federal Reserve issued its monetary policy statement following its two-day meeting. The statement contained no surprises (more below) and the market’s reaction was rather muted. There was some selling in the minutes following the Fed’s release, but the bears never were able to gain a strong hold. In fact, the major equity averages soon pared the losses and then proceeded to bounce around the neutral line before moving higher into the closing bell. At the conclusion of trading, the Dow Jones Industrial (up 42 points), the broader S&P 500 Index, and the small-cap Russell 2000 eked out small gains, while the tech-heavy NASDAQ was off modestly, shedding five points. Overall, advancing issues led decliners by a modest (1.3 to 1) margin on both the Big Board and the NASDAQ, which was not overly surprising given the gains in three of the four major indexes.
As noted above, the yesterday day’s big news was the Federal Reserve’s monetary policy decision. As expected, the lead bank kept the federal funds rate at 1.0% to 1.25%, which was the overwhelming consensus heading into the announcement. Likewise, forecasts for the total number of expected interest-rate hikes this year remained unchanged with one more quarter-point raise possible by December. Officials also project three rate hikes in 2018.The central bank noted that the economy is continuing to rise moderately this year and the labor market is strengthening, but in the current low pricing environment (inflation is running below the Fed’s target of 2.0%) and with the devastation caused by Hurricanes Harvey, Irma, and Maria likely to affect economic activity in the coming months, it does not believe it is the appropriate time to tighten the monetary reins. This dovish decision, though, was somewhat offset by the central bank’s announcement that it will begin to unwind its $4.5 trillion balance sheet. The Fed’s balance sheet normalization program will begin next month by decreasing the bank’s reinvestment of principal payments. Specifically, payments will only be reinvested when they exceed gradually rising caps, which start at $6 billion per month for Treasuries and $4 billion per month for agency debt and mortgage-backed securities.
Although there was an overall muted response to the Fed’s monetary policy decision, it did prompt some notable sector rotation. The lead bank’s announcement that it will begin reduce its $4.5 trillion balance sheet next month, a maneuver that will likely put some upward pressure on fixed-income yields, weighed on the higher-yielding equity groups (i.e., utilities, telecom, and consumer staples). The higher bond yields would make fixed-income instruments more attractive to income-oriented investors, likely lowering the demand for riskier high-yielding equities. On the opposite end, the possibility of higher lending rates, the result of the forthcoming bond selling, helped the financial stocks, notably those of the banks. The dollar’s rally following the Fed statement also hurt the basic materials stocks. A stronger greenback makes commodities more expensive in overseas markets.
Looking ahead to the day at hand, our sense is that the investment community will continue to digest yesterday’s monetary policy news and also will be watching the latest reports from Washington D.C., especially with the news from the earnings and business beats light once again today. With less than an hour to go before the commencement of trading stateside, the equity futures are indicating a rather flattish opening to U.S. equity market, with a slight downward bent. 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.
