U.S. equities finished mixed on Wednesday, recovering from early weakness to close near the unchanged line. Investors were focused on the release of the July Federal Reserve meeting minutes. As expected, the Fed further walked back rate hike expectations for the rest of the year amid ongoing doubts about the health of the economy and a lack of clear and definitive evidence of wage inflation.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 gained 0.2%, the Nasdaq Composite gained a fraction and the Russell 2000 lost 0.3%.
Treasury bonds were stronger across the curve, the dollar was flat and gold lost 0.5%. Oil gained another 0.5% after recovering from an inventory-driven selloff in the early going. That pushed the United States Oil Fund LP (ETF) (NYSEARCA:USO) back over its 50-day moving average for the first time since June.
Defensive utility stocks led the way with a 1.5% gain while consumer discretionary were the laggards, down 0.2%. The latter was hit by some disappointing retail results. Target Corporation (NYSE:TGT) lost 6.4% after comps missed expectations and traffic declined 2.2% (the first drop in nearly two years). Guidance also was soft. Lowe’s Companies, Inc. (NYSE:LOW) dropped 5.7% on weaker-than-expected comp-store sales and bloated inventories.
Turning back to the Fed …
The July minutes indicated officials wanted to wait before raising rates on further confirmation of economic robustness in the data. The minutes noted that the “neutral” rate could potentially remain quite low, justifying a slow and cautious approach to rate hikes. That’s something San Francisco Fed President John Williams discussed in a speech on Monday and St. Louis Fed President James Bullard mentioned today.
On the hawkish side, the minutes indicated discussion on issues such as potential overvaluation in the commercial real estate market, stretched equity valuations relative to earnings, and the fact that the long experiment with ultra-low interest rates has driven many investors to “reach for yield” and perhaps take on more risk than is prudent.
Probably the strongest new dovish takeaway, however, was the fact officials noted recent tightening in lending standards — something that has rarely, if ever, happened outside the context of new recessions.
As a result, the chances of a rate hike in 2016 collapsed as the futures market now puts March 2017 as the first Fed meeting with better-than-even odds of a rate hike.
The recent market uptrend should respond positively to this, focusing on new areas of strength such as retailers, financials and energy stocks like ConocoPhillips (NYSE:COP). COP shares have punched back up and over their 200-day moving average. That bolstered the Sep $43 calls recommended to Edge Pro subscribers that are already up nearly 10% since they were added on Tuesday.
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.
