Stocks Hit 2016 Highs on Dovish Yellen

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U.S. equities climbed to new highs for the year as Federal Reserve Board Chair Janet Yellen responded to Friday’s surprisingly weak jobs report. Although she noted that the economy appears strong and that policy normalization would continue at a gradual pace, she also labeled the May jobs report as “disappointing,” and failed to say that another rate hike would be appropriate “in coming months” as she did on May 27.

Other officials sounded a more hawkish note — as had been the norm until last Friday’s jobs numbers — with St. Louis Fed president James Bullard and Atlanta Fed president Dennis Lockhart both suggesting a July rate hike was still a possibility.

Today’s comments come as Fed officials enter a media blackout period ahead of their policy meeting later this month. The futures market has basically priced out the odds of any Fed hikes in June or July, pushing any possible action until the end of the year. CME Fed fund futures put the odds of a July hike at only 23%.

In the end, the Dow Jones Industrial Average gained 0.6%, the S&P 500 gained 0.5%, the Nasdaq Composite gained 0.5% and the Russell 2000 gained 1.1%. Treasury bonds were weaker, the dollar was little changed, gold gained 0.4% and crude oil added 2.2%.

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Energy stocks carried the day thanks to a surge in services stocks, lifting the group 2%. Devon Energy Corp (NYSE:DVN) gained 4.6% after announcing it had entered into an agreement to sell around $1 billion in non-core assets.

Defensive utility stocks were the laggards, down 0.2%. Gun maker Sturm, Ruger & Company (NYSE:RGR) lost 6.7% after being downgraded by analysts at BB&T Capital Markets suggesting a slowdown in consumer demand based on an analysis of NICS background-check data.

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Back to the Fed.

The market’s reaction to Yellen’s comments were a little surprising. What she said wasn’t over-the-top dovish given the May jobs report was the weakest in six years. But with markets still addicted to the flow of cheap money, any indication no matter how small is a reason to bid stocks. Bulls also ignored Lockhart’s and Bullard’s comments.

Lockhart said he personally still sees two rate moves in 2016 and as many as three (compared to the one-and-done or none-and-done the market wants to see). Bullard said the underlying trend in the jobs market is solid and that a slower pace of job gains — as the labor market nears or is already at full employment — would be okay.

Bulls also ignored Yellen’s comment that everyone shouldn’t read too much into one month’s data.

For now, trading remains very technical and nervy as stocks continue to skid just below massive, three-year resistance near Dow 18,000 in the context of a three-month consolidation range. A strong short-covering dynamic is winning the day, with the stocks with the largest short float leading the way and a very mechanical slamming of the CBOE Volatility Index (INDEXCBOE:VIX) juicing the major averages into the closing bell over the last few days.

Another catalyst has been the two-day drop in the U.S. dollar following Friday’s payroll numbers, which has lifted the entire commodities complex despite ongoing fundamental headwinds. And let’s not forget about the fact that corporate earnings are in a recession (down four quarters in a row) and that global economic data remains uneven.

A possible warning sign that the three-week rebound out of the mid-May low has run its course is the fact that despite today’s flashy gains, traders bid up long volatility protection — pushing the VIX higher on the day.

The next insight into the health of the job market will come on Wednesday when the Job Openings and Labor Turnover Survey is released, which is one of Yellen’s favorite data points. If openings remain strong, watch for the June/July rate hike odds to rebound and stocks to struggle.

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.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/economy-markets-yellen-federal-reserve-stocks-2016/.

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