The Federal Reserve said Wednesday that it sees continued economic pain and low inflation as a results of the coronavirus, which has put the U.S. economy into recession. The Fed said it will maintain its benchmark lending rate for the foreseeable future.
Stocks, on the surface, looked like they were rallying, but a closer look at the market shows fear.
The S&P 500, after having been flat to down most of the day rose as much as 0.5%, as the tech-heavy Nasdaq rose 1.3%. The S&P 500 did then fall 0.5% as the Nasdaq’s gain eased. The NYSE FANG index, which has a roughly 20% market cap weighing in the S&P 500, rose as much as 2%.
Investors buy up tech stocks with secular growth trends when they are uneasy about cyclical stocks as the economic trajectory looks uncertain.
The 10-Year Treasury yield slipped to 0.75% from 0.82% Tuesday, as interest rates appear to be going not much higher for the medium-term, according to the Fed. This is a risk-off signal. Yields fall when prices rise.
"The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” the Federal Reserve said in a statement. The bank then said it will maintain its target federal funds rate at between 0% and 0.25%.
That’s the stimulus investors are hoping to continuing seeing through the pandemic and recovery from it, but the Fed’s commentary also suggests a long road ahead, even though the S&P 500 is only within a few percentage points from its all-time-high.
"The Fed is clearly signaling that we are not by any means out of the woods yet,” said James McCann, Senior Global Economist at Aberdeen Standard Investment.
"The jobs report was probably as much of a positive surprise to them as the rest of the market. But it doesn’t change the fact that a recovery is going to take years, not months. Powell is trying to send a strong signal here today that the Fed is going to keep policy very loose for a long time,” McCann said.
Cyclical sectors like consumer discretionary, banking, industrials and oil all fell between 2.8% and 5.5%.
This structure of market sentiment was unchanged from the morning: investors were piling into tech for shelter and safe bonds and away from cyclical value.
"The FOMC hit the bull’s eye today in terms of delivering exactly what the market was expecting, no more, no less,” said Seema Shah, Chief Strategist at Principal Global Investors. "The key message of lower for longer, reiterated by the dot plot, suggests interest rates are locked near the zero bound through the forecast period to 2022. Notably, their forecast shows GDP falling 6.5% this year, before almost erasing those losses with an expansion of 5% in 2021.”
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