The S&P 500 was able to scratch out a 0.17% gain, even as the tech-heavy Nasdaq, the components of which have a heavy market cap weighting in the S&P, fell 0.34%.
It was a full-on bullish day on Wall Street. Not only did cyclical stocks — not growth tech — carry the major indices, but the 10-Year Treasury yield rose to 0.75%. The Fed’s announcements centers on low interest rates, but treasury yields have already been reflecting an ultra low federal funds rate and the new policy is even more inflationary.
The Federal Reserve announced on its website at around 9:10 am EDT that its policy stance now seeks to push inflation up above 2%, not just to 2%. Pre-virus, a strong economy with full employment was unable to consistently produce inflation at 2%, so with the challenges posed by the pandemic, the Fed’s asset purchasing programs need to be large enough to keep interest rates low, liquidity flowing and economic demand strong.
Cyclical sectors like consumer discretionary, oil, industrials and materials all rose, with many sectors up about 0.5%. Banking stocks rose more than 2%, as the yield curve has aggressively expanded this week, a major positive for bank profitability.
Also, the Food and Drug Administration authorized the emergency use of Abbott Laboratories’ (ABT) - Get Report coronavirus test. That means the company can now mass produce and distribute a $5, easily usable test to schools and other institutions. That could enable those institutions to operate normally, which is an economic tailwind. Cyclical stocks were teetering between the red and green in the morning after the Abbott news hit the wires, but when the Fed made its announcement, those stocks moved up substantially.
For Abbott, the stock rose 7.85% to $111 a share. An analyst at CFRA raised his price target on Abbott, as he sees the FDA development adding $750 million in quarterly revenue, which is a $3 billion annual run rate. The company saw about $30 billion in revenue in 2019, so the added revenue is about 10% of that figure.
As for the Fed -- the biggest driver of markets Thursday -- investors are encouraged and comforted by the Fed’s position that it will do whatever it can to support the economy. But the bottom of the range for the federal funds rate is already 0%. With low rates already priced into stock valuations and possibly built into economic and earnings forecasts, questions over how much monetary policy can push up stocks remain.
Here’s what Wall Street’s saying:
Mike Loewengart, Head, Investment Strategy, E*trade:
"The era of easy money is here. Loosening up on target inflation ushers in a new age of low rates for the foreseeable future—which could have a heavy impact on everything from the banking sector, to the housing sector, to retail in the form of low credit card interest rates. It could be a win for investors and the market. The initial jobless claims numbers coming in slightly over a million this morning only emphasizes the massive undertaking the Fed faces with combating unemployment—a key objective of the Fed. As we move ahead, there’s no doubt that a lot rides on how we continue to recover from the pandemic. But Powell has made it clear that the FOMC is ready to deploy all of their tools and adapt to the changing economic environment.’
Seema Shah, Chief Strategist, Principal Global Investors:
"Powell’s more relaxed approach to inflation may have been broadly in line with expectations, but it may also have triggered some deep discussions over at the ECB [European Central Bank]. Both central banks will need to be cautious of a serious policy mis-step. Up until now, the Fed has been concerned that a robust labour market may cause an outbreak of inflation. But perhaps now, the focus will shift to a concern that, even if the Fed permits inflation to run ahead of its target, the labour market will fail to recover. Rising inflation and high unemployment is one combination that - as all central banks will agree - is deeply undesirable. The Fed needs to get this one right.”
Nigel Green, Founder, deVere Group:
"Against this backdrop [Fed announcement], many more will pile further into equities, which appear to be on a winning streak.”