Thursday,December 20, 2018, 12:17 PM, EST
- NASDAQ Composite-1.8%Dow-1.3%S&P 500-1.2%Russell 2000-1.8%
- NASDAQ Advancers:831Decliners:1478
- Today's Volume (100 day avg)+4.19%
- Crude $46.67-$1.50, Gold $1258.86-$16.780
- Market still digesting FOMC/Powell statements from yesterday
- Oil lower again today
- Jobless Claims reported at 214,000 actual vs. 215,000 est.
- Continuing claims were 1.69 million vs. 1.66 est.
Stocks sold off sharply yesterday after Jerome Powell and the Fed gave out coal instead of presents to equity investors. Traders had hoped for more dovish commentary and the increased likelihood of two or more rate hikes next year vs. the one that futures were pricing in caused stocks to sell off. Additionally, the continuation of $50B per month in quantitative tightening was a disappointment.
Specifically, the Fed retained in its statement language there would be "further gradual" rate increases, only adding the word "some" in front of the phrase. The market wanted to see that phrase removed and see the FOMC state it would be "data dependent", code for "we're watching the markets and won't hike if things get bad".
The Fed has pretty much stuck to its plan but after Jerome Powell's speech at the Economic Club of NY markets convinced themselves the FOMC would look to recent bond, stock and oil price developments and offer up a slower pace of rate increases.
Instead the Fed's view is that the U.S. economy is strong and therefore can withstand additional tightening. The Fed is basically saying that Wall Street is not Main Street and the market is saying "Hey, you guys might be missing something". Stocks are certainly trading as if the "Fed Put" is no longer. Time will tell.
The Dow closed lower by about 350 points yesterday (a 700+ point reversal from earlier, hopeful gains) and closed at the lows for the year. The 10-year yield fell to 2.75%. It seems like ages ago (but only in early November) that the 10-year was above 3.2% and heading higher. One would have hoped that since a good U.S. economy, low rates and one less expected 2019 rate hike is not that bad, stocks could bounce but it didn't happen.
Rather, stocks are re-setting to new expectations about interest rates. Stock futures implied a negative opening right from the start and the broad indexes were uniformly lower this morning. Oil is also trading at yearly lows of $46.67 (-$1.50).
There are only 6 full trading sessions left in the year (Christmas Eve is a ½ day). With vacations starting and a number of 2019 concerns piling up, buyers seem to be taking a breather and hopefully will return in 2019 if there is progress made on the trade front. The senate passed a stopgap funding bill to keep the government open until Fed 8th so maybe that concern can be removed for the time being.
In stocks today, The Dow fell a quick 200 points and is now lower by about 300 points (1.3%) as we write. The S&P 500 is down 1.2% while the Nasdaq Composite is lower by 1.8%. Small Caps are getting hit harder as has been the case recently with the Russell 2000 lower by 1.8%. In corporate news Walgreens announced $1 billion in cost cuts but shares fell.
Uber will put self-driving cars back into service and Altria will invest $12.8 billion in Juul Labs, giving it a 35% stake. All S&P sectors fell this morning but Utilities and REITS (safety trades) are higher with Consumer Discretionary and tech weighted shares faring the worst. Gold is seeing its largest daily gain in over six weeks, up $16.78 to $12.59.86/oz
Today, the Philly Fed Business Outlook Survey Index was lower than expected at 9.4 vs. 15.0 consensus. But it's not all bad. Initial Jobless Claims were in-line, 214,000 vs. 215,000 expected and highlight the still-strong job market.
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Brian's Technical Take
If Trump is unhappy with yesterday's "not so dovish" rate hike, he has no one to blame but himself. After all he had the dove of all doves in Janet Yellen as his Fed Chair before replacing her after just one term of service. That move was historic as you would have to go all the way back to 1927 to find the last time a Fed chair, who had served a full term, was then not nominated a second term.
While Trump now criticizes Powell for being far too hawkish, he initially was very outspoken and critical of Yellen during his 2016 campaign for being far too dovish. Yet once in office he then praised her for her work, but still replaced her. Trump's about face is confusing but not all that surprising. However the market certainly seemed surprise by yesterday's FOMC statement and Powell's Q&A, and I am in that camp.
In early October Powell came across hawkish when he noted rates were far away from neutral, and the committee could continue with hikes above the normal level. Following seven weeks of corrective price action, Powell did his own about face in the final days of November by saying interest rates were just below neutral which indicates the Fed could pause rate hikes sooner than previously expected.
The markets welcomed the more dovish tone, albeit animal spirits did not last more than a couple of weeks. However along with yesterday's 25bps hike which was widely expected, the committee reiterated it could hike rates above neutral and in the Q&A Powell stated the pace of the great unwind will continue on its current course of $50B per month.
Yes GDP is strong, unemployment is low, and real rates are still negative which combined support the case for continued rate hikes. And yes the committee lowered its target for normalized rates. However there seemed to be less concern about what's currently going on in the markets and what that could be signaling about future economic activity and inflation.
And over the course of Q4 the markets perception of Powell has gone from hawkish, to dovish, to now confusing. Pundits are quickly making the rounds questioning whether the "Fed put" that existed with Bernanke and Yellen at the helm is no longer there.
Maybe the correct long term path is to remove the punch bowl and get off the stimulus of negative rates (real) and an inflated balance sheet. After all if you cannot do it following back to back GDP prints of 4.2% and 3.5%, along with average hourly earnings at near 10 year highs of 3.1%, when will you be able to? And maybe the sample is too small and other factors could be at play causing slowing global growth and declining inflation.
Time will tell how this plays out from here but in the short term it is clearly proving to be a bumpy ride. We leave you with the 2's-10's spread which is dipping into single bps territory and thus very close to inverting. Many studies show there is a considerable amount of time between inversion and an actual recession, however (i) there are exceptions to every rule, and (ii) you do not need a recession to see a 20% correction in the stock market.
In 2011 the S&P 500 and Nasdaq Composite corrected more than 20% while the Russell 2000 declined nearly 31%. Then we had a US debt downgrade and concerns about the EU. Today we have rate hikes, QT, concerns about the EU (arguably to a lesser extent), China trade war and the tariff man, the potential for a government shutdown, and now a nearly inverted curve.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.