Stocks rose Wednesday in a fairly risk-on rally, but the Federal Reserve’s comments at 2 pm may be pivotal for Wednesday’s action.
The S&P 500 rose 0.4%, with the tech-heavy Nasdaq’s gain at only 0.1%, meaning it wasn’t tech, but rather other sectors doing much of the leg work. Value’s outperformance began to fade some just after the market open. The 10-Year Treasury yield was flat at 0.67%. The yield hasn’t been able to rise of late, as the Federal Reserve’s new policy — while inflationary in theory — promises that long-term rates will remain low even when inflation does begin to run hot. This is also highly supportive of stocks.
Tech stocks were mixed, but mostly not rising aggressively. Facebook (FB) - Get Facebook, Inc. Class A Report shares fell 0.1% after having initially falling more than 1% as the Federal Trade Commission is preparing an antitrust lawsuit against the tech giant.
Many cyclical stocks like some airlines and restaurants were up a few tenths of a percentage point. Oil rose, while banks fell after having risen. The yield curve is failing the steepen. Valuations for consumer discretionary stocks are beginning to look very rich, while other sectors trade at more tolerable valuations when considering the ultra-low interest rate environment.
Investors are still holding a lot of cash that they had built up during the throws of the pandemic, enabling them to nibble at shares of companies they like. Strategists at Bank of America Global Research say investors they had surveyed have about 4.8% of their portfolios in cash, up from 4.6% a week ago, with 5% representing a key level of bearishness. Bank of America says 41% of investors think a vaccine is the most important factor in getting the economy and inflation moving and recently, evidence that a vaccine is on the way has emerged.
Also aiding equities was Fedex’s (FDX) - Get FedEx Corporation Report earnings report in which it beat revenue estimates by 10% with more than $19 billion of revenue. Fedex attributed the results to higher shipments volumes in the U.S. and abroad. This paints a positive picture of global economic and consumer demand and the magnitude of the beat certainly isn’t hurting the market, but most companies have already shown on their second quarter earnings reports that the economy is recovering faster than perviously anticipated. Fedex shares rose 8%.
The Federal Reserve will reveal a decision on interest rates at 2 pm. The benchmark lending rate cannot fall much from here — it’s near 0%. But the Fed can be more explicit about how it will execute its new policy of letting inflation run above 2% before lifting rates. Any comments on the economy — negative or positive — could certainly move the market.
"The focus will be on economic projections – rates will be forecast at rock bottom for years – so the main point of interest will be the economy and employment,” wrote Jasper Lawler, head of research at London Capital Group in emailed remarks to reporters. "The Fed guesstimated a 9.3% unemployment rate at the end of the year – and its 8.4% now – so presumably we can expect some upward revisions there."