U.S. equities mostly finished lower on Thursday amid profit taking after a strong two-day rally as investors look ahead to Federal Reserve Board Chair Janet Yellen’s eagerly awaited speech on Friday.
Everyone is waiting to see if she echoes recent hawkish commentary from Fed officials talking up the odds of a June or July interest rate hike given stabilization in inflation and ongoing strength in the labor market. The futures market was only expecting a single rate hike later this year; but policymakers are talking up the chances of two, three, or even four quarter-point hikes.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 lost a fraction, the Nasdaq Composite wafted up 0.1% and the Russell 2000 lost 0.1%. Treasury bonds strengthened, the dollar weakened, gold lost 0.3% and crude oil lost 0.4% to close at $49.34 a barrel.
Defensive sectors led the way, with utilities up 1.1% and telecoms up 0.5%. Materials and financials were the laggards, down 1.1% and 0.6% respectively.
Costco Wholesale Corporation (NASDAQ:COST) gained 3.6% on a first-quarter earnings per share beat on better profitability despite a difficult retail environment and food price deflation. Netflix, Inc. (NASDAQ:NFLX) gained 2.6%.
On the downside, Tidewater Inc. (NYSE:TDW) lost 36.2% on a disclosure the company is in talks with lenders regarding covenants at it expects to be in default by August.
Economic data was mixed, durable goods orders beat expectations, rising 3.4% in April over March vs. the 0.5% rise expected and the 1.9% gain in March. Details were a little underwhelming, with aircraft orders leading the way. Jobless claims fell more than expected. And there was more positive housing data, with pending home sales up 5.1% month-over-month in April to the highest level in a decade — beating expectations for a 0.7% rise.
Hawkish chatter continued from the Fed: Dallas Fed president Kaplan said that assuming economic data maintains its recent pattern, he would advocate a rate hike sometime this summer; Fed governor Powell said another rate hike may be appropriate fairly soon as the economy moves toward maximum employment and stable prices.
Technically, the theme of the day was decoupling as stocks pretty much separated from every other asset today. The yen carry trade moved lower. Oil was lower. High-yield bonds were lower; treasury yields were lower; the dollar was lower; all suggests the epic short-squeeze of the last two weeks is ending.
All we need is for Yellen to confirm what all her cohorts are saying: The economy is strong enough to justify another rate hike and markets have rebounded nicely from the scary volatility seen at the start of the year. With that, we’re likely to see another bout of weakness driven by a strengthening dollar, weaker commodity prices, and a resumption of energy sector default worries amid ongoing declines in corporate profitability.
Now’s the time to trim long positions. Edge Pro subscribers today booked partial profits in their Apple Inc. (NASDAQ:AAPL) June $98 calls that are up nearly 72% since recommended on Tuesday.
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.
