U.S. equities mostly moved lower Wednesday after Federal Reserve Board Chair Janet Yellen disappointed those looking for hints of fresh stimulus after talking up the health of the labor market.
This disappointment undid the strength seen in early trading on reports beleaguered Eurozone financial giant Deutsche Bank AG USA (NYSE:DB) was considering a multi-billion bond buyback after its contingent convertibles (so-called “CoCo” bonds) came under pressure. Namely from weak operating results, increased capital requirements from regulators, pressure on Eurozone sovereign bonds, the hit from negative long-term interest rates and upcoming debt repayments.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 wafted down a fraction, the Nasdaq Composite dropped 0.4% and the Russell 2000 lost a fraction. The Dow closed below the critical 16,000 level for the first time since late January, a sign that the bulls are losing control after a multi-week reprieve from the selling seen last month.
Treasury bonds strengthened somewhat, the dollar weakened, gold lost a touch and crude oil lost 2% to close at $27.38 amid ongoing inventory builds and a lack of concrete progress toward production cuts by OPEC.
Healthcare stocks led the way with a 0.9% gain thanks to hospitals and managed-care names. Tech got a lift from the 21.2% surge in Akamai Technologies, Inc. (NASDAQ:AKAM) after a fourth-quarter earnings and revenue beat. Panera Bread Co (NASDAQ:PNRA) gained 5% after a Q4 earnings per share beat driven by a better-than-expected 3.6% growth in comp store sales.
Materials stocks led the decliners with chemical names a drag. Media stocks were hit again with Time Warner Inc (NYSE:TWX) down 5% after an earnings beat that was seen as low quality and reliant on lower taxes after missing on revenues on slow HBO subscriber growth. Walt Disney Co (NYSE:DIS) lost 3.8% as operating earnings in its media segment missed with cord cutting concerns still an overhang.
After the close Tesla Motors Inc (NASDAQ:TSLA) reported a surprise quarterly loss and weaker-than-expected revenue but solid production and delivery numbers, lifting shares up 12% in after-hours trading. Twitter Inc (NYSE:TWTR) cut a big after-hours plunge to a 1.2% loss as of this writing after reporting mixed results (strong earnings but weak revenues) and a first-ever drop in U.S. users.
While gold futures moved lower, the Gold Trust SPDR (NYSEARCA:GLD) gained 0.8%, pushing the Feb $105 calls recommended to Edge Pro subscribers to a gain of more than 428%. A rise in precious metals mining stocks lifted Barrick Gold Corporation USA (NYSE:ABX) to a gain of 54% since recommended to Edge subscribers back in November.
Gold is moving higher not only on safe haven inflows, with credit markets under pressure both here and overseas, but also on rising expectations of more aggressive measures by the major central banks. Both the Bank of Japan and the European Central Bank have pushed policy rates into negative territory. The Fed is widely expected to back away from its four-quarter-point rate hike outlook for 2016 soon as bond-market derived inflation expectations, shown above, crater.
Put simply: Inflation expectations are no longer well anchored. And the Fed will need to respond to that. Yellen, apparently, didn’t get the script today. And that bothered investors.
Instead, in her semiannual testimony to Congress, she reiterated expectations for gradual rate hikes, mentioned risks from China and talked up the economic tailwinds from still-low interest rates and cheap oil. After a drop in the unemployment rate to 4.9% along with an increase in the job openings and job quits rate, she admitted she didn’t see a reason the Fed would to follow the BoJ and the ECB by cutting rates in the near term.
For the stimulus junkies on the Street, this was a nails-on-chalkboard moment. Not what they wanted to hear.
As a result, expect the market to continue to pressure the Fed into admitting the December rate hike was a policy mistake by slamming stock and bonds on worries over corporate earnings, the waterfall collapse in energy prices, China, European bonds, the hit to tourism and travel from the Zika virus and a recent slowdown in U.S. economic data.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
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