With the big Federal Reserve “hike or no hike” decision coming to anti-climatically end last week, Wall Street is turning its attention to the rising odds of another government shutdown. Stocks finished mixed while most of the action was in commodities and bonds.
In the end, the Dow Jones Industrial Average gained 0.8%, the S&P 500 gained 0.5%, the Nasdaq Composite went up a fraction and the Russell 2000 swooped 0.2% lower.
Biotech stocks were hit after Hillary Clinton tweeted that she is preparing to unveil proposals to lower the cost of prescriptions. In response, the Biotech iShares (IBB) lost 4.5% to drop back below its 200-day moving average. While outside of healthcare, all other major sector groups managed to post gains, with financials leading the way with a 1.1% gain.
GoPro (GPRO) lost 8.2% after a cautious article on the stock from Barron’s dubbing GPRo as a one-product wonder vulnerable to new competition. Tesla Motors (TSLA) gained 1.4% despite trading lower earlier Monday on reports that Apple (AAPL) had given the green light to its electric vehicle project.
Relatively hawkish comments from Fed officials over the weekend and into Monday reversed some of the moves seen at the end of last week, with the U.S. dollar moving 1.1% higher. As a result, gold lost 0.4% but oil gained 4.5% thanks to an assumption from OPEC that prices would return to $80 a barrel by 2020, as output falls elsewhere.
That helped push up the value of the U.S. Oil Fund (USO) October $16 calls to a gain of nearly 20% since recommended to Edge Pro subscribers on Thursday.
San Francisco Fed President, John Williams, said he believes it is still appropriate for the Fed to raise rates before the end of the year — reiterating concerns against waiting too long. Richmond Fed President, Jeffrey Lacker, said he dissented against the September policy decision because of his belief that the economy needs higher rates due to labor market tightness. While the St Louis Fed President, James Bullard, said he would’ve dissented against the decision and believes the case for policy normalization is strong.
This morning, Atlanta Fed President Dennis Lockhart sounded a dovish note by warning that a government shutdown would create more uncertainty about the path of the economy — leaving open the possibility that the Fed holds off on rate hikes through the end of the year.
Concerning that, Politico warned that there is a 75% chance of a shutdown at the end of the month as the political backlash against Planned Parenthood grows in the context of a need for Congress to pass a new budget for the fiscal 2016 year. The debt ceiling is also coming back into play, with Societe Generale warning that a deal will need to be made within the next month-and-a-half or so.
With the September Fed decision so close, another fiscal standoff will surely give chairman Janet Yellen cold feet about raising rates for the first time since 2006. As a result, I’m recommending clients focus on pro-inflation/anti-dollar trades including crude oil and gold as inflation expectations look set to rise further.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
