U.S. equities moved lower on Thursday as investors continue to react to a sudden hawkish turn by the Federal Reserve — pushing large-cap stocks below three-month support levels and starting what looks like the first significant downtrend since January.
In the end, the Dow Jones Industrial Average lost 0.5%, the S&P 500 dropped 0.4% to fall into the red for the year-to-date, the Nasdaq Composite lost 0.6% and the Russell 2000 ended the day 0.7% lower. Treasury bonds strengthened slightly, the dollar was mixed, gold lost 1.5% and oil lost a touch.
Defensive utility stocks led the way with a 0.9% gain while industrials were the laggards, down 1%. Wal-Mart Stores, Inc. (NYSE:WMT) gained 9.6% after reporting a first-quarter earnings-per-share beat on a 1% rise in U.S. comp-store sales, ahead of the 0.5% growth expected. Traffic was up 1.5%. Forward guidance was strong.
There was more good retail news — a rarity these days — from American Eagle Outfitters (NYSE:AEO) and Urban Outfitters, Inc. (NASDAQ:URBN) pushing share prices up 18.3% and 14%, respectively on earnings beats. After the close, Gap Inc (NYSE:GPS) gained 3.6% on in-line earnings and revenues as well as a cut to capital expenditures guidance — a result that wasn’t as bad as feared.
Caterpillar Inc. (NYSE:CAT) fell 1.6% on a three-month retail sales decline of 12%.
Back to the Fed.
Both the April Fed meeting minutes released on Wednesday and a cavalcade of individual Fed speakers have all sent the same message: The market’s one-and-done rate hike expectations for 2016 were too low and we could see as many as three or maybe even four quarter-point hikes this year starting in June.
New York Fed President William Dudley said that a June or July tightening would be reasonable given a Q2 bounce back in GDP growth. And Richmond Fed President Lacker said the market overestimated how likely the Fed was to pause its tightening campaign. He added that rates could’ve been raised in March and April and that he would be comfortable with four rate hikes this year.
All of this, of course, assumes ongoing stabilization in inflation and continuing strength in the labor market. But with crude oil trading well and job openings near record highs, this looks assured.
With stocks trading in sideways range since late 2014, things look headed for another bout of volatility and weakness as Wall Street — which has grown addicted to the Fed’s largesse — throws another temper tantrum over policy normalization.
To be sure, there is plenty to be worried about. Economic data is uneven. Corporate earnings are falling at rates rarely seen outside of a recession. Political tensions are high. Global trade volumes have been dropping for years. And there is a big credit overhang, both in terms of corporations (which have borrowed heavily to fund stock buybacks) and governments (the Eurozone debt crisis, the Chinese credit-based stimulus and more).
The Fed’s newfound aggressiveness is just added to this list.
As a result, I continue to recommend defensive/short-side positions such as the Boeing Co (NYSE:BA) June $130 puts that gained nearly 20% for Edge Pro subscribers since recommended on Wednesday as the airplane maker suffers a breakdown out of its post-February uptrend.
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.
