Markets Risk-on After Fed Makes Long-Term Policy Adjustment

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The major U.S. indices were mixed. Tech wavered, while cyclicals — or economically-sensitive stocks — showed strength. The Federal Reserve made an important announcement that enabled the risk-on posture in the market. 

The S&P was largely flat, to up a touch, as cyclical sectors rose. The S&P was held back by the components of the tech-heavy Nasdaq, which fell a few tenths of a percentage point. Initially, the Nasdaq was up, but when investors see factors that can push the economy forward coming into play, they tend to favor cyclical value stocks. Investors were also moving out of the safe 10-Year Treasury bond, which saw its yield rise to 0.71%, after having initially fallen. Yields rise when prices fall. .

Banking stocks were up about 0.7% as the yield curve expanded. Oil rose and so did many consumer discretionary stocks, inducing ones that thrive on optimism of a quick recovery and re-openings. Airlines were up around 5%. 

Positively, the Food and Drug Administration granted emergency authorization use of Abbot Laboratories’  (ABT) - Get Report $5 coronavirus test. Decision could enable the company to distribute a small, easily usable and low cost test, enabling schools and other institutions to operate normally. That’s an economic positive. And it’s an opportunity for Abbot, whose shares rose 6% Thursday. 

Negatively, weekly jobless claims were 1.01 million against estimates of 1 million and not much improved over last week’s reading of 1.1 million. Investors are hoping to see an improvement in the trend of about 1 million jobless claims filed per week. But with interest rates unable to fall much from here, Congress not yet set on a new fiscal stimulus plan and states largely far away from fully reopened, small businesses and households need cash in order for employment and consumer spend to resume strength. This all threatens the speed of the economic recovery. 

"If Congress fails to reauthorize PUA [pandemic unemployment assistance], the impacts to other parts of the economy could very well dent this very unsteady recovery,” said Jamie Cox, Managing Partner at Harris Financial Group. 

But those are short-term data points. 

Investors are digesting the words of Federal Reserve Chairman Jerome Powell, who is addressing inflation and the future of monetary policy in a speech. "But if Powell’s speech is interpreted as less dovish, we could see a downside correction across the US indices, where the overbought market conditions hint that a pullback would only be healthy at the current levels,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank in emailed remarks to reporters. 

Stocks need interest rates to remain low to maintain their current valuation levels, although the Fed has made it clear it will continue all asset purchasing programs at their current sizes until the economy has recovered. Investors are now looking to economic data and vaccine news to see that 2021 will bring a bounce-back in economic output and corporate earnings. Without low interest rates and a smooth recovery, the market is on somewhat shaky footing. 

The big announcement:

The Fed did say on its website before the market’s open that it is adjusting its policy position for the better. With economic conditions harsh because of the pandemic and a pre-existing economic condition in which inflation was stubbornly low even when employment was full, the Fed is now using policy to ultimately move inflation above 2%, not to meet 2%. 

This policy adjustment does not change what investors already knew, which was that the Fed’s programs are currently wide-ranging and worth trillions of dollars. Still, investors are content with the reaffirmation that the Fed will be as accommodative to the economy as possible. 

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