Another Fed announcement, another huge decline from gains into closing losses, and what else is new?
At least the market did not close on the lows of the day as it did after the September and November Fed sessions, but once again traders did not learn their lessons from past such disasters as the major indices started modestly higher and then kept pushing and pushing to the upside as at the time of the 2pm statement, the Dow was ahead by 287 and the S&P was up by 34 to 4052 which starts to get into that tough resistance area.
So as the script usually goes, things got torpedoed once again as the Dow turned that 287 point advance into a decline of as much as 404 before battling its way back to finally end lower by 142 down to 33,966. It was hurt by selling in financial components AXP and GS. The S&P also followed suit with a collapse from that 34 point gain to a loss of as much as 54 before it also recovered to finally end 24 points lower at 3995.
The Nasdaq also went down to finish 85 points lower to 11,170 while the Russell 2000 Index of small stocks finished 12 points off to 1820. Meanwhile, the VIX also declined down to 21.14 which is not what one wants to see on a sharply lower day.
Unfortunately, after raising the federal funds rate by 50 basis points for its seventh increase this year and a slowdown from the four consecutive increases of 75 basis points, what was bearish for the market is that Powell said that they expected rates would be higher over the coming few years than it had previously anticipated and this took the market by surprise as investors were expecting the Fed to tone down its hawkishness which unfortunately it did not.
Recent reports that inflation, while still painfully high, has eased had stoked optimism that the Fed might signal the possibility of rate cuts in the second half of next year. But during a press conference following the Fed’s latest policy announcement, Fed Chair Jerome Powell emphasized that the full effects of the central bank’s efforts to slow the economy to bring down inflation have yet to be fully felt.
“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Powell said.
Powell also reiterated that the Fed plans to hold rates at a level high enough to slow the economy “for some time” to ensure inflation really is crushed. He said the Fed’s projections released Wednesday do not include any rate cuts in 2023.
“I wouldn’t see the committee cutting rates until we’re confident that inflation is moving down in a sustained way,” Powell said.
He also said that how fast the Fed raises rates is not so important now. “It’s far more important to think what is the ultimate level,” Powell said.
The latest increase brings the federal funds rate to a range of 4.25% to 4.5%, its highest level in 15 years. Fed policymakers now forecast that the rate will reach a range of 5% to 5.25% by the end of 2023. That suggests the Fed is prepared to raise rates by an additional 75 basis points in 2023.
The Fed also signaled it expects the rate will come down by the end of 2024 to 4.1%, and drop to 3.1% at the end of 2025.
This was considerably higher than expectations priced into financial markets, which were positioned for the federal funds rate to come back down to 3.9% at the end of 2023 and to 2.6% at the end of 2024.
And what was not good news, which is why the market is going to start out sharply lower today, was that their projections for economic growth in 2023 was for a gain of only 0.5% while they see the unemployment rate rising to 4.6% from its current level of 3.7% and this is not a good combination.
Bond yields were mixed with the 10-year Note down to 3.51% while the 2-year held steady at 4.22%.
Earnings this week will see: yesterday – ORCL lower; today – LEN lower; tonight – ADBE, JBL; Friday – WGO, DRI and ACN.
Economic reports will have: yesterday – November import prices fell by 0.6% while export prices eased by 0.3%, Fed interest rate raising decision (see above); today – November retail sales fell by 0.6% for the lowest this year while ex-autos and gasoline were off by 0.2%, November industrial production dropped by 0.2% for the lowest since September 2021 and capacity utilization was 79.7, December Philadelphia Fed Manufacturing Survey fell to -13.8, December NY State Empire Manufacturing Survey fell by 11.2% to the lowest since August, weekly jobless claims fell by 20K to 211K.
Donald M. Selkin
Chief Market Strategist
Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.