Fed day dawns with investors on the edge of their seats waiting for Chairman Jerome Powell and company’s latest words on the economy. The market apparently sees a “V-shaped” recovery shaping up, so what does the Fed see?
With that looming, things might be uneventful in the hours leading up to this afternoon’s Fed press conference. There just aren’t a lot of other potential market-moving catalysts out there right now, and there could be some back-and-forth trading.
Judging by what we’ve seen in pre-market hours, it looks like the Nasdaq (COMP) and the Dow Jones Industrial Average ($DJI) are set to continue yesterday’s pattern where they parted company. The $DJI fell and the COMP rose before the opening bell, just like on Tuesday. That suggests “stay-at-home” tech stocks might have the upper hand for the moment, though the $DJI started recovering as the open drew closer.
Yesterday’s weak close for the $DJI and the S&P 500 Index (SPX) was actually kind of healthy, when you think about it. The market had been cruising higher on autopilot for so many days it probably needed a little wash-out at some point, and profit-taking was likely to blame.
What’s encouraging is that even with the selling, the SPX was able to close yesterday above the psychological 3200 level. That could be positive from a technical perspective heading into today, with 3200 possibly a support point. Resistance might be near 3225 and 3250.
Meanwhile, gold is up for the third day in a row. The $1,700 an ounce level had been one that some analysts were watching, and now the metal trades at $1,731. So for those who use gold as a warning signal, it’s certainly flashing. Volatility has also been swinging higher this week after trending lower for more than a month.
A sprinkling of data this morning showed consumer prices falling 0.1% in May vs. analysts’ expectations of a flat reading. Nothing much to see here, move on.
Not Much Give on Rates as Fed Gathers
Futures trading suggests the Fed is likely to leave its benchmark rate at the current level of between zero and 0.25%, so there’s little drama there. The decision will be announced at 2 p.m. ET, followed by Fed Chair Jerome Powell’s press conference.
Any drama that does happen could center around the Fed’s statement Powell’s words at what seems likely to be a virtual podium. Will Powell and the Fed make any announcements about new measures to help the stumbling economy? Does it look like things are getting better, the way last week’s jobs report suggested? Many think Powell might try to convey a cautiously optimistic kind of tone.
It will be interesting to hear what Powell and company lay out in terms of growth. This may be the first hint about the “optimism trade” and whether investors seem to be in line with the central bank or out of sync.
One key thing to consider watching for is the Fed’s updated “dot-plot” of rate expectations. This tool, which the Fed releases once per quarter, provides a forecast of Fed officials’ individual expectations for the rate path over the next two to three years.
While the Fed releases a dot-plot once per quarter, that wasn’t the case in Q1 when the regular meeting got canceled as the pandemic raged and the Fed pushed through two emergency rate cuts. Those rate rollbacks took the Fed funds rate down from a range of between 1.5% and 1.75% at the start of the year to between zero and 0.25% where it stands now.
The dot plot will show investors for the first time in six months where Fed officials see rates going over the next few years. Unfortunately, like the rest of us, the people at the Fed don’t know if and when there might be a resurgence of COVID-19 and possibly more economic shutdowns. No one could see any of this coming back in December when the Fed released its last dot-plot, either. So the projections should definitely be taken with a grain of salt
That said, it might be interesting to see if anyone there is projecting a slower economic recovery than the stock market. The long rally since late March likely reflects widespread hopes for a “V-shaped” recovery in the economy. If the Fed’s most talented minds don’t agree, maybe that could give investors a pause. It also could be interesting to compare the Fed’s current statement to its last one to get a better sense of the central bank’s latest economic temperature check.
Also, keep in mind that if the Fed sounds less dovish than many expect it to, that might help put a brake on stocks. Typically, markets are pretty sensitive to anything Powell says in his press conference, so that’s probably a time to take extra care if you’re going into or out of any trades at that time.
The crazy thing is that CME Group’s (CME) FedWatch tool shows 16.4% odds of a rate hike today, but that’s almost definitely noise. It’s extremely unlikely to happen (see more below).
FAANGs Sharpened Tuesday
You know the saying, “What’s old is new again?” It might have been coined especially for Wall Street yesterday as the “FAANG” gang helped give the COMP a decent boost even as the S&P 500 Index (SPX), the Russell 2000 (RUT) and the $DJI retreated from Monday’s massive buying. For the $DJI, yesterday’s loss ended a six-session winning streak.
At one point yesterday, the COMP climbed above 10000 for the first time in its history. That helps show how powerful the Info Tech sector has been.
Amazon.com Inc AMZN and Apple Inc AAPL made new all-time highs, and Facebook Inc FB also cruised along with a 3% move up the ladder after getting an analyst upgrade. It feels like on any given day the market moves between the “stay-at-home” stocks embodied in some ways by these big-tech names and the “recess period” ones like Boeing Co BA, casinos, and airlines that tend to perform best when reopening optimism flares. Tuesday was stay-at-home day.
It wasn’t really too surprising to see the Dow Jones Transportation Average ($DJT), which includes the major airlines, come in for a landing Tuesday considering how fast and far this sector had come. A little profit-taking appeared to be in the mix yesterday, especially with BA, which dropped nearly 6%.
Greenback Turns Red
As the Fed keeps rates at extremely low levels, the U.S. dollar continues to lose ground. Last week, we mentioned that the dollar index had fallen below a key technical support level. The downward pattern accelerated this week as the index fell well below 97 on Tuesday after trading near 100 as recently as late May. The low so far this year was just below 95 in early March, so that might be a place to look for possible technical support.
Why care about the dollar? Well, as veteran investors know, a weaker dollar can help U.S. manufacturers by making their products more affordable overseas. At the same time, it can hurt overseas companies because it becomes harder to compete with U.S. products. Gold and crude have been rising, which might be tied in to the dollar’s recent softness.
Also, the dollar decline is happening just as stocks get back to a near recovery from the pandemic lows, so maybe this is another sign of investor money coming out of so-called “safe havens” like the dollar and into more risky but potentially faster-growing investments. When the worst days of the crisis were taking place in late March, the dollar scrambled to nearly three-year highs, which some analysts saw as a sign of investors fleeing into what they hoped would be the safety of the world’s reserve currency. The decline since then might be a symbol of investors taking a more “risk-on” approach, which could have worked its way into the market’s recent performance.
If the dollar keeps getting blocked and tackled, some of the major multinational companies that rely heavily on overseas sales could conceivably benefit. We’re talking about semiconductor shares, big agricultural and construction equipment makers, and some of the big tech names.
CHART OF THE DAY: IN WITH THE OLD: A few years ago, FAANGS led the entire market higher before they lost some of their steam in the last year or two. That’s changed since COVID-19, as this three-month chart shows. FAANGS (candlestick—$NYFAANG) lead the S&P 500 Index (SPX—purple line) pretty solidly since early March. Data Source: NYSE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
What the Hike? A month ago, the CME Fed funds futures market pointed to zero chance of a rate hike today. That’s changed, on paper at least, but probably not in reality. As of early Wednesday, anyone checking the CME “FedWatch” tool online might have been surprised to see the odds tick up to 16% that the Fed could raise rates by 25 basis points. That’s probably noise, as we pointed out yesterday, because the Fed has been very clear it doesn’t plan to hike rates until the economy gets back to near full employment—something Wall Street analysts don’t see happening any time in the next year and a half.
So what’s driving the futures market? It could be overall economic optimism following last week’s impressive May payrolls report. It also might reflect hope among some investors that rates won’t stay at the current level near zero forever, even if this meeting isn’t the one where things change. Or it may just be a few money managers willing to pay a few ticks as insurance against the unlikely scenario of a rate hike. As last week’s employment report reminded us, surprises happen.
Follow the Curve: Early last week, we pointed out that the long-term 30-year bond yield had started to build on its premium to the 10-year yield. The elevating yield curve pattern continued as last week rolled on, illustrated by the 10-year yield reaching its steepest premium to the two-year yield since early 2018 before yields gave up some ground early this week. A steepening yield curve often reflects investor optimism about the economy, and bears watching as the week advances. The fly in the ointment, so to speak, would be if 30-year yields start rising enough to slow down the housing market due to higher mortgage rates. It does seem a little early to begin worrying about that, however, with levels still so low.
Bankrupt? No Fooling: Shares of Hertz Global Holdings Inc HTZ, the bankrupt rental car company, joined the market rally last week even with the company on the ropes. Shares touched bottom at 56 cents before an unbelievable rally to $5.56 by Monday. The left hook came yesterday when shares fell double-digits. Still, you can’t help notice that HTZ isn’t the only bankrupt company where investors apparently decided they wanted to get in at the basement level. JC Penney Company Inc JCPQ shares also soared recently.
Here’s the thing: If you’re one of the people tempted by these low prices, it’s probably not something where you should risk any more than you could afford to lose. These bankrupt stocks are going to likely be volatile, as some of the recent HTZ investors possibly learned Tuesday. Another thing to remember is that ultimately, it doesn’t matter if one of these companies continues operating as it comes out of bankruptcy. HTZ is trading on speculative fervor now, but if it emerges from bankruptcy it will be a different company, and the equity that’s trading now won’t be what’s out there at that future date. Which means current shares might get torched in between now and then. So it might pay to take some extra care.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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