Stocks rallied Wednesday after the Federal Reserve held rates steady as expected and said it would embark on a more cautious plan of interest rate increases.
Fed Chair Janet Yellen said the federal funds rate is expected to rise to 0.875% by year end. This implies just two increases in 2016 rather than the four previously expected. The central bank also lowered its target rate projection for 2017 from 2.40% to 1.90%.
The energy sector led, with the Energy Select Sector SPDR (ETF) (XLE) up 1.7%. This was spurred by a 5.8% jump in WTI oil to $38.46 a barrel.
Banks were among the worst performers. The postponement of rate hikes means they will not benefit from bigger spreads. Large U.S. lenders, represented by the KBW Nasdaq Bank Index, fell 1%.
The yield on the 10-year Treasury fell to 1.94% from 1.96% on Tuesday. The U.S. dollar lost 0.8% against a basket of 16 currencies to hit its lowest since October. And gold added 2.7% at $1,263.10 an ounce.
At Wednesday’s close, the Dow Jones Industrial Average gained 74 points at 17,326, the S&P 500 was up 11 points at 2,027, the Nasdaq added 35 points at 4,764 and the Russell 2000 advanced 8 points to 1,075.
The NYSE Composite traded 682 million shares with total volume of 4 billion. The Nasdaq crossed 1.8 billion shares. On the Big Board, advancers outpaced decliners by 4.3-to-1, and on the Nasdaq, advancers led by 1.5-to-1. Block trades increased to 5,761 from 5,110 on Tuesday.
The chart of the S&P 500 shows a very broad trading band from the highs of July November and December to the lows of August, January and February.
In between, the S&P 500 danced around the 1,990-2,020 band for months until it finally broke out of it Wednesday by 8.69 points on low volume and an overbought MACD.
Conclusion
Once again, the Fed has succeeded in making the one move that would boost stock prices — more easy money. A “more accommodative” stance is washing the globe in money that cannot be invested. And even if it could, it is unlikely that it would be paid back in like value. For instance, just consider the number of devaluations China’s currency has undergone.
The Europeans, and perhaps even the Fed, are again considering deeper negative interest rates on interbank loans in order to “encourage” member banks to loan out money. But even with that, there are few borrowers.
I read, although I can’t put my finger on where, that over the past five years, 85% of the stock market’s advance has been due to Fed action. Well, they’ve done it again.
A question for our readers: Has the Fed’s action brought in more earnings to corporations or made us better investors? Scholarly answers only, please.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
