Energy Stocks Slip As Oil Prices Drop
The yield on the 10-year Treasury note fell 6 basis points to 3.41% after climbing higher the past three sessions.
Verra Mobility shares are up 1.7% and it has reset its base count by undercutting the low in its prior pattern. That makes the transportation data intelligence company’s current cup with handle a first-stage base. The buy point is 16.83.
While Verra’s 50-day moving average remains below its 200-day line, the stock has found support at its 200-day benchmark. Having posted average earnings growth of 73% over the last three quarters, Verra has found a spot on the IBD Breakout Stocks Index.
The Innovator IBD 50 ETF rose 0.3%, led by industrial stocks.
Most of the 11 S& P sector indexes were higher. The Energy Select Sector SPDR ETF fell 1.3%. The price of U.S. crude declined 0.7% to $118.13 a barrel.
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The Feds Conflicting Mandates
The Fed has two jobsthe so-called dual mandateassigned by Congress: Keep prices stable and maximize employment. While it may be entirely appropriate for the Fed to end bond purchases and raise rates to tame inflation, some market participants hope the central bank doesnt go overboard and sacrifice economic growth and jobs.
The consensus among bond traders is that after a relatively small number of rate hikes the economy will slow meaningfully, at least enough that inflation will cool and the Fed will stop hiking, said Tom Graff, head of fixed income at Brown Advisory.
Thats why the yield on 10-year Treasuries remain so muted despite sky-high inflation. While growth may have been strong when money was being pumped into the system, the economy will revert to pre-pandemic low-to-moderate growth thanks to long-standing themes, such as an aging workforce, globalization and technological advances.
The Fed thinks it can turn toward a hawkish policy because the employment situation has improved so much since the initial pandemic fallout. The unemployment rate, for instance, is down to 3.9% and wages are surgingalthough not as much as inflation.
That disconnect may be why the Fed doesnt end up acting as aggressively as many assume. In one sense, the Fed is caught in the middle with its dual mandate: Tighten too much, and youre not going to be able to maximize employment, after all.
What Happens When Interest Rates Rise
When the Federal Reserve acts to increase the discount rate, it immediately elevates short-term borrowing costs for financial institutions. This has a ripple effect on virtually all other borrowing costs for companies and consumers in an economy.
Because it costs financial institutions more to borrow money, these same financial institutions often increase the rates they charge their customers to borrow money. So individuals consumers are impacted through increases to their credit card and mortgage interest rates, especially if these loans carry a variable interest rate. When the interest rate for credit cards and mortgages increases, the amount of money that consumers can spend decreases.
Consumers still have to pay their bills. When those bills become more expensive, households are left with less disposable income. When consumers have less discretionary spending money, businesses’ revenues and profits decrease.
So, as you can see, as rates rise, businesses are not only impacted by higher borrowing costs, but they are also exposed to the adverse effects of flagging consumer demand. Both of these factors can weigh on earnings and stock prices.
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Do Stock Markets Fall When Interest Rates Rise
Heres the thing about the U.S. stock market and interest rate hikes. If you try to find data showing a correlation between rising rates and falling markets, you might be disappointed.
Dow Jones Market Data recently analyzed the five most recent rate hike cycles to see what history says about stock market returns in these periods. Their analysisduplicated in the chart belowillustrates that during these five long-term periods, the three leading stock market indexes only declined during one rate hike cycle.
|Rate Hike Cycle
When factored together, the S& P 500 saw a median increase across all five cycles of 30%, while the Nasdaq delivered a median gain of nearly 27% and the Dow Jones industrial Average delivered a median increase of 17.4%.
During the series of rate hikes from June 29, 2004, to Sept. 17, 2007, for example, the federal funds rate soared from 1.0% to 5.25%and the DJIA gained 28.7%.
You dont have to reach back that far to find evidence that challenges the idea that rising rates lead to falling stocks. In 2017, the Fed raised rates three timesand the S& P 500 climbed more than 18%.
Rumblings About Another Recession
Speaking of speculation, Wall Street banks have been trotting out predictions for when the next recession could start. For now, the consensus is generally that an economic downturn is more likely to begin sometime in 2023which helps explain why traders have punished stock prices in recent months.
The rebound in the stock market at the end of May didnt ease those concerns. And even if the S& P 500 didnt officially deliver the 20% decline necessary to be deemed in a bear market, there are a ton of bear markets among the individual members of the benchmark, Gordon says.
Looking ahead, Gordon will be watching to see what stocks are leading the still-nascent rally and whether gains are driven by some of the weakest and most highly volatile sectors of the market.
While the base-case scenario is that the U.S. economy will enter a recession by sometime next year, Samana cautions that such projections may not happen or the downturn could be mild.
Its important to remember that all economic cycles end in recession. The next one could have a different flavor than the Covid Recession or the Great Recession, Gordon notes. To suggest a recession is not coming at some point its just a false narrative.
Both Gordon and Samana are monitoring economic reports for signs of weakening, such as in the housing market. The cooling of the once-hot housing market is cause for concern because it doesnt bode well for either consumer or investor confidence, Gordon says.
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Outlook Forum Debates New Regime
Opening frame: Whats driving markets? Market take
We brought together senior investors from across BlackRock to talk about the outlook for the rest of the year.
Title slide: 3 observations from our investor forum
1: A new market environment
There was wide recognition that this regime is different as it relates to macro, as it relates to markets. In a supply-driven macro environment the tradeoff between growth and inflation is so much harder. And the politicization of everything makes decision-making so much harder as well. And all of that means Goldilocks as an outcome is no longer on the table and buying the dip as an investment trade idea does not apply quite so much either.
2: 60% stock / 40% bond portfolio revisited
The second observation is around this idea that well the 60/40 typical portfolio doesnt quite work as much. If you think about 2022, its actually the worst year on record for a 60/40 portfolio and also as we think about hedging out some of this macro risk which is very very difficult, risks models calibrated to history need to be revisited.
3: Bigger and more changes to portfolios
And the third observation is around this idea that in an environment where we have higher macro volatility, higher market volatility then more frequent and potentially bigger and more dynamic adjustments to portfolios will be warranted.
How To Invest In June
With the Fed intent on raising interest rates and signs of weakness in the economy, its no wonder the stock market has been turbulent in recent months. As market participants continue to sort out whether the economy can sustain higher interest rates without contracting, expect more market volatility.
Within the stock market, expect more rotation among the various sectors, particularly from goods-oriented companies to service providers, he adds.
Meanwhile, Samana says that Wells Fargo Investment Institute has shifted allocations away from stocks into bonds and is advising investors to have more patience when deciding how to invest money.
Investors may also want to take a closer look at their asset allocation, focusing less on the consumer-reliant sectors like consumer discretionary and communication services, and more on sectors that historically do well when the economy slows, like consumer staples, utilities and healthcare.
People have gotten so used to shorter, V-shaped recoveries and this may not be one because the Fed is in such a different place with fighting inflation, Samana says.
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Stocks Jump After Powell Signals Fed Will Stay Tough On Inflation Dow Snaps 5
Stocks rallied on Wednesday after the Federal Reserve hiked rates by 75 basis points its largest increase since 1994 and signaled it could raise rates by a similar magnitude in July, giving investors confidence the central bank was committed to tamping down inflation.
The Dow Jones Industrial Average snapped a five-day losing streak, jumping 303.70 points, or 1%, to close at 30,668.53. The S& P 500 rose 1.46% to 3,789.99 while, the Nasdaq Composite gained 2.5% to end the day at 11,099.15.
Stocks were volatile after the rate hike decision but jumped to session highs as Fed Chairman Jerome Powell said during his afternoon press conference that, “either a 50 basis point or a 75 basis point increase seems most likely at our next meeting.”
The market had anticipated a 75 basis point rate hike Wednesday, but it was Powell’s willingness to do another hike of that size that surprised markets.
“The more aggressive stance can still be consistent with a softish landing for the economy, but the path is getting narrower,” wrote Barry Gilbert, asset allocation strategist for LPL Financial. “We still think the Fed may be able to back off from its new forecast of a 3.4% benchmark rate at the end of the year, but for now, the priority is showing resolve.”
Boeing and other shares closely linked to economic growth jumped higher on the hope that rates could rise without tipping the economy into a recession. Boeing surged 9.5%. Regional banks and financials also gained.
Is Don’t Fight The Fed Good Advice
When the Fed sets monetary policy, it uses historical data to measure the health of the economy. It then uses that information to set the stage for any changes. For example, the FOMC meets eight times per year. It discusses the economy and decides the stance it will take on monetary policy. Any changes that the committee recommends, and that the Fed makes, can take some time to affect the economy.
Many people base decisions on policy changes from the Fed after these meetings. It’s important to keep in mind that the lag time between the economy and monetary policy can lead to different market scenarios. If you invest counter to the Fed’s current policy, you could end up losing money when you could be making gains.
The Fed only makes changes when necessary, because it takes a long time for the effects of any changes to be seen.
In general, you shouldn’t base your decision solely on the policies of the Fed. Many other factors impact the economy, including:
- Geopolitical changes
- Global health crises
- Trade policy
The Fed’s interest rates and monetary policy are among many factors that influence stock prices and economic trends. It’s important to consider all of these factors, as well as your risk tolerance and financial goals, when making investment decisions.
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The Feds Delicate Balancing Act
The Feds dual mandate requires the central bank to attempt to keep prices stable and maximize employment.
For months, markets and policymakers have been overcome with inflation monomania, but the Feds employment mandate is moving back into focus hand-in-hand with growth concerns.
The next Federal Open Markets Committee meeting is scheduled for June 14 and 15, and market participants are likely to pay particular attention to two economic reports ahead of the confab.
First up is the monthly jobs report, scheduled for release on June 3, followed by the May consumer price index reading on inflation thats due on June 10.
Right now, the Fed needs to balance its need to fight inflation by raising interest rates against being too aggressive, as tighter monetary policy will almost certainly slow the pace of economic growth. Just how well the central bank can navigate this tightrope remains to be seen.
Inflation fell for the first time in eight months in April and the latest reading of gross domestic product showed that the U.S. economys contraction in the first quarter was worse than initially estimated.
Meanwhile, market participants have scaled back their expectations for how aggressively policymakers could raise the fed funds rate at the upcoming FOMC meeting. About a month ago, traders were bracing for the possibility of a 75 basis point hike, but now see 50 bps raises as likely in June and July.
Minutes From The Latest Fed Meeting Made Investors Nervous
Stock market investors have had to deal with a slew of factors affecting the financial markets, and many of their concerns came to a head on Wednesday. With bond markets continuing to see yields push ever higher and turbulence in other areas like commodities, major stock indexes suffered declines. As we’ve seen recently, the smallest drop came for the Dow Jones Industrial Average , with the S& P 500 and Nasdaq Composite seeing ever-larger drops on the day.
Data source: Yahoo! Finance.
The big news of the day came from the Federal Reserve, which released the minutes from its Federal Open Market Committee meeting on monetary policy from mid-March. The minutes revealed an extensive strategy for tightening policy that took some investors by surprise, and many now seem to wonder whether the Fed is actively looking to take on the stock market and the speculative fervor that has accompanied the easy-money policies of the past several years.
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The Lessons Of January
The first trading day of 2022 saw the S& P 500 top out at an all-time high just shy of 4,800, but its been all downhill since then. The benchmark index lost 5.3% in Januaryand there were six separate sessions where it fell by 1% or more, marking the dramatic return of volatility to markets.
The big moves last month could be a sign of things to come. There have been eight times since 1945 when the stock market enjoyed a so-called Santa Claus rallybig gains in the last week of the yearfollowed by a sell-off in the first five trading days of the new year plus an overall decline for the month of January, according to CFRA chief investment strategist Sam Stovall. In those instances, the S& P 500 ended up lower for the full year by an average of 9.6%.
The market pessimism began after the release of the December FOMC meeting minutes. The minutes showed that Fed officials were not only considering rate hikes and ending QE quicker than expected but that they would also consider shrinking the Feds balance sheet by selling off some of the horde of assets it has built up.
If QE is defined as the Fed buying bonds, then the Fed selling off those bonds must be called quantitative tightening, market participants reasoned.
The FOMC minutes were released in the afternoon of Jan. 5. The S& P 500 declined nearly 2% that day. By Jan. 24, the S& P 500 had entered correction territory. It didnt stay there, but it certainly did freak everybody out.
How Will Higher Interest Rates Affect Crypto And Commodities Markets
Two other major asset classes have had varied responses in the face of higher rates. While cryptocurrency prices have plummeted along with other risky assets, many commodities have spiked higher, including oil, wheat and nickel. Will these moves prove short-lived?
Cryptocurrency has often been touted as a cure-all for what ails you, whether thats inflation, low interest rates, lack of purchasing power, devaluation of the dollar and so on. Those positives were easy to believe in as long as crypto was rising, seemingly regardless of other assets.
Crypto assets had been seen as an inflation hedge, but recently they have acted more like other risk assets such as stocks, says Tucker. Higher rates will be a headwind for crypto assets going forward.
Indeed, cryptocurrencies have responded to reduced liquidity as did other risky assets, by falling when the Fed announced in November it would begin tapering its purchases of bonds and signaled higher interest rates were soon on the way.
While Raju acknowledges that crypto assets are certainly feeling the headwinds of higher rates, he anticipates an up year. I strongly believe crypto will be a net positive in 2022 because any short declines driven by rate hikes will be offset by greater institutional and retail active trader adoption of this asset class, he says.
The prices of some commodities have skyrocketed, a move that could potentially complicate how fast the Fed raises interest rates.
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Should Stock Investors Worry
The fact that stock indexes fell on the same day as the Fed minutes came out suggests a causal link between the two. However, investors had already gotten advance warning of the gist of what the minutes revealed, so it’s hard to put the blame for the market decline squarely on the Fed release. Moreover, stocks rose on the day of the actual meeting in question in March, so it’s odd to draw an opposite conclusion from the minutes of the same meeting.
Higher interest rates have restrained economic activity in the past, but it’s uncertain what impact they’ll have now. Household finances, on average, are in relatively good shape, and many people still have pent-up demand for goods and services they’ve gone without during the two years of the COVID-19 pandemic. That’s likely to support economic activity at least for a while, although sustained pressure on the economy will eventually have an impact.
Indeed, if stock markets respond to rising rates by working their way lower, they’ll effectively do some of the Federal Reserve’s work to cool the economy for it. That might seem like a high price to pay, but if it effectively kills the latest inflationary spurt, many will judge that it will have been well worth the cost.