U.S. equities were volatile, but ultimately finished higher on Wednesday thanks to a late-session rally after the Federal Reserve held interest rates steady, as expected. It was a “hawkish hold” that talked up their health of the economy and set the stage for a single quarter-point hike before the end of the year. Most likely, in December.
Fed policymakers see the risks to the economy as “balanced” for the first time since last year, justifying their opinion that the case for a rate hike has strengthened. But continuing a tendency to err on the side of patience and more stimulus, the Fed wants to wait for further confirmation inflation will increase to their 2% target and that labor market slack is, in fact, being reduced.
This decision removed the single largest risk to stocks heading into the U.S. presidential election in November, and should clear the way for a nice relief rebound out of the tight three-month trading range we’ve suffered. Also contributing was a largely “as expected” decision by the Bank of Japan overnight to limit the downside of its negative interest rate stimulus program.
In the end, the Dow Jones Industrial Average gained 0.9%, the S&P 500 Index gained 1.1%, the Nasdaq Composite gained 1% and the Russell 2000 gained 1.4%. Treasury bonds were mostly stronger, the dollar was down against the yen, gold gained 1% and oil was higher on good inventory data, up 2.9%.
While oil traders remain focused on a possible production freeze agreement out of a non-formal OPEC meeting in Algiers later this month, reports of a significant draw of oil stockpiles (with the EIA reporting a 6.2 million barrel decline) boosted sentiment.
That lifted energy stocks to the day’s best performance, up 2.1%. Vale SA (ADR) (NYSE:VALE) surged 7.1% thanks to a broad rally in the metals (on higher inflation expectations related to the Fed) and an upgrade from analysts at Barclays Capital citing valuations. Adobe Systems Incorporated (NASDAQ:ADBE) gained 7.1% on quarterly results. And Microsoft Corporation (NASDAQ:MSFT) gained 1.7% on an 8.3% increase to its quarterly dividend and a new $40 billion buyback authorization.
Defensive consumer staples stocks were the laggards, up just 0.6%. Netflix, Inc. (NASDAQ:NFLX) lost 3.4% after M Science reportedly said subscriber churn could result in weak user metrics for the third quarter. Wells Fargo & Co (NYSE:WFC) dropped 1.6% on a downgrade from Morgan Stanley on Senate hearings and public scrutiny on fake accounts and related executive compensation.
Turning back to the Fed, the updated Summary of Economic Projections showed a forecast for only three quarter-point rate hikes by the end of 2017. The Fed also cut its long-term GDP growth rate estimate to just 1.7% to 2%, the lowest on record. This is fueling thinking that the economy’s “neutral” interest rate is lower than before, justifying a very slow and gradual rate hike cycle.
On a technical basis, and after a three-month rest, stocks led by the tech-heavy Nasdaq look ready for another rally to new highs into October before worries about the presidential election, third-quarter corporate earnings and the odds of that December rate hike trim sentiment.
The market is nice and oversold, with the percentage of New York Stock Exchange stocks above their 50-day moving average hovering near 35% — the lows reached during the late-June Brexit selloff.
In anticipation of a rally, I’m recommending a number of turnaround plays like GoPro Inc (NASDAQ:GPRO) to my Edge subscribers, which gained nearly 5% today on building excitement over its new Hero 5 and Karma drone products heading into the holiday shopping season.
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.
