On Wednesday, markets waited with bated breath for another batch of headlines out of the Federal Reserve. This time, it was the release of the Fed’s April meeting minutes.
And while the initial takeaway and reaction was positive (stocks surged as fewer officials supported a June hike), the averages drifted lower on reports from CNBC that a weak Q1 GDP report could be revised higher due to seasonal adjustments. With stocks so dependent on the flow of stimulus, good economic news is considered bad news since it raises the odds the Fed acts in June (which still is on the table, technically) and/or September — which is sooner than the futures market expects.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.1%, the Nasdaq gained a fraction, and the Russell 2000 gained 0.2%.
Treasury bonds rebounded slightly while the dollar was mostly higher. Crude oil rallied with West Texas Intermediate up 1.4% to close at $58.82 a barrel on weekly oil storage data.
Retail continued to be in focus as Q1 sales disappointed at Lowe’s Companies, Inc. (NYSE:LOW) and comp-store sales grew 5.2% vs. the 6.1% analysts were expecting sending shares down 4.6%. Staples, Inc. (NASDAQ:SPLS) was another laggard, down 1.6%. American Eagle Outfitters (NYSE:AEO) gained 5.5% on strong Q1 earnings and an increase to Q2 guidance above consensus.
Airline stocks were hit, with Southwest Airlines Co (NYSE:LUV) down 9.1% after the company was downgraded by Buckingham after warning Q2 passenger revenues per available seat mile would fall 3% from last year. The chatter is that excess capacity growth will weigh on margins as prices are driven lower — which is good news for consumers but bad news for shareholders. American Airlines Group Inc (NASDAQ:AAL) dropped 10% after its CEO said the company will compete aggressively with discount carriers that are adding capacity and cutting fares to keep planes full.
As a result, transportation stocks overall dropped 2% as they continue to lag the performance of the Dow Jones Industrial Average.
Financial stocks were also hit, down 0.4% as a group — this on currency settlement headlines with regulators and a note from Baird downgrading regionals at current valuations on estimates the stocks have already priced in the net interest margin gains from a 1% increase in the Federal funds rate.
Stocks are still looking vulnerable here as breadth remains unimpressive and energy prices (and thus, energy stocks) look set for a fresh slide as Saudi Arabia cranks up production while long-term bond prices slide (pushing up yields) as the Fed’s reluctance to raise rates pushes up inflation expectations.
I’ve been recommending clients target areas of weakness such as Ford Motor Company (NYSE:F), which is struggling to stay above its 200-day moving average. The June $16 puts recommended to Edge Pro subscribers on May 8 are up nearly 34% with room for much more.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
