Most stocks rose considerably Wednesday after the Federal Reserve confirmed its incredibly accommodative monetary policy and issued a positive economic outlook. Tech stocks plummeted, dragging the major indices down.
The S&P 500 fell 0.46%, a deceiving move because it was brought down by the few tech stocks worth trillions of dollars. The Nasdaq, many components of which have idiosyncratic growth drivers not correlated to economic output, fell 1.25%. The Dow Jones Industrial Average, not market-cap weighted unlike the S&P 500, rose 0.13%. Crude oil rose 4% to $40 a barrel. The 10-Year treasury yield, which has had trouble rising even on largely risk-on days in the market, rose to 0.69%. The 30-year yield rose to 1.45%. Yields rise when prices fall.
Treasury yields have been pressured because the speedy economic recovery has been powered by, and partially hinges on, the promise of low interest rates.
The Federal Reserve announced it will keep short-term rates pinned near 0% through 2023. The market expected this outcome and stock valuations have already priced in the ultra-low rate environment, but the Fed in many ways gave a green light to stock investors, who have adopted the mentality of “TINA,” or “there is no alternative” to stocks since rates are so low.
The Fed said it sees GDP growth coming in at 4% in 2021 and inflation coming in at 1.7%, roughly in line with pre-pandemic rates of inflation. This validates the market’s recent narrative that the economic and earnings recovery will continue to be speedy. Plus, the Fed said it doesn’t expect 2% inflation until 2023. That’s crucial because the Fed recently updated its policy saying that it will not lift rates when inflation hits 2%, but when it sustainably averages 2%. This means inflation has to run higher than 2% for some time for rates to rise, which in turn means rates truly will not rise until at least later than 2023. This is extremely supportive to economic growth and stock valuations.
Treasury yields rose because they currently offer no real return over inflation, but the aggressive stimulus is designed to stimulate demand and inflation, making safe bonds incrementally less attractive
And this all makes cyclical stocks incrementally more attractive.
Large cap oil stocks rose more than 4%. Even large cap consumer discretionary stocks, some of which have been trading at stretched valuations both compared to interest rates and to the broader market, rose 0.66%. Bank stocks rose along with the expanding yield curve. Manufacturing stocks rose as well.
Fedex (FDX) shares rose 5.8% after it beat earnings estimates handily. It’s more than $19 billion in render for the quarter was 10% higher than expectations, as management said higher shipment volumes both globally and in the U.S. carried Fedex’s quarter. This bodes well for economic and consumer demand, even though investors had already seen tons of second quarter earnings reports confirm as much. The magnitude of the beat was impressive.
With investors ditching the still-expensive big tech group, Facebook (FB) and Google (GOOGL) investors had a particularly rough day. Facebook and Google fell 3.27% and 1.5%, respectively, as the Federal Trade Commission is reportedly preparing an anti-trust case against Facebook.
Here’s what Wall Street’s saying:
Jason Pride, Chief Investment Officer, Private Wealth, Glenmede:
"The Fed’s inertia was largely expected. While monetary policy itself cannot solve the underlying cause of this recession (i.e. the pandemic), it can prime the economy for a stronger, more durable recovery once the dust finally settles on this pandemic.”
Ryan Detrick, Chief Market Strategist, LPL Financial:
"The Fed confirmed what we all thought, rates at 0% are here to stay, probably for years. That wasn’t a surprise, but what was a pleasant surprise is how much they increased their full-year GDP decline, to down 3.7% from down 6.5% in June. This helped confirm economic activity in the third-quarter has greatly surprised to the upside. A better economy and a dovish Fed, that is a nice combo.”
Seemah Shah, Chief Strategist, Principal Global Investors:
"What does it tell us when bond yields fail to budge in reaction to Fed projections showing interest rates pinned near zero for the foreseeable future? First, it demonstrates clear success of Fed communication and credibility. Second and more importantly, markets are addicted to Fed stimulus and low interest rates. When the day eventually comes, it will be extremely challenging to wean markets off this dependency on low rates.”
Charlie Ripley, Senior Investment Strategist, Allianz Investment Management:
“With near-term risks to the outlook still intact, the Fed continues to reiterate that it is too early for victory laps on the economic recovery. On the horizon, the path of the virus, the upcoming election, and the motivation for additional fiscal stimulus are all hurdles the economy needs to overcome. Overall, this aligns with Allianz Investment Management’s view that while we can see the light through the trees, we are not out of the woods yet when referencing the path of the economic recovery."