Stocks are suffered a rare selloff on Tuesday as investors braced for President Trump’s first speech to a joint session of Congress. A definite “risk off” smell is in the air, after Monday’s rally to new highs represented the longest-ever run of consecutive records. Breadth has been narrow, the advance has been led by “defensive” stocks in areas like utilities and sentiment measures are off-the-charts extreme.
Adding to the pressure was a late-session surge in March rate hike odds in the futures market after come very hawkish commentary from three separate Federal Reserve officials.
In the end, the Dow Jones Industrial Average lost 0.1% to snap a 12-day winning streak, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.6% and the Russell 2000 lost 1.5%. Treasury bonds were mostly weaker, the dollar was mixed, gold lost 0.4% and oil finished down 0.4% with gasoline getting pressured after the close on an inventory build.
Defensive utilities and consumer staples stocks led the way with gains of 0.9% and 0.2%, respectively. Consumer discretionary stocks were the laggards. Gold mining stocks enjoyed a rebound on safe haven buying, listing the Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) 1.9% for Edge subscribers.
Target Corporation (NYSE:TGT) fell 12.2% after reporting weaker-than-expected earnings per share for the fourth quarter and issuing weak forward guidance, blaming a shift in consumer behavior to online retailers.
Turning back to the Fed, March rate hike odds are at 72% and rising — above the unofficial 70% threshold that has presaged rate hikes in the past. This after Philly Fed president Patrick Harker, speaking at Temple University, reiterated his comments from Feb. 15 that not only is the economy firming up, but that he sees three quarter-point rate hikes as appropriate this year.
This was followed by comments from San Francisco president John Williams, speaking in Santa Cruz, where he said the economy is “too hot” and that a March rate hike is “very much on the table for serious consideration.” He added that “right now interest rates are abnormally low.”
And finally, New York Fed president Bill Dudley told CNN in an interview that the case for further policy tightening had become a “lot more compelling.”
Stocks have yet to fully react to these headlines, which in years’ past would’ve rattled stimulus-addicted traders to the core. But these days, attention has moved from the Fed’s machinations to what Trump will do on deregulation, taxes and stimulus spending.
Yet let’s not forget: With the national debt swelling towards $20 trillion, and with corporate profitability growth tepid, a more aggressive pace of Fed rate hike will not only pressure the U.S. budget deficit but it will undermine U.S. equity valuations as well.
There is also a political element in all this as well: Trump criticized Federal Reserve Board Chair Janet Yellen on the campaign trail for holding interest rates artificially low to boost the stock market for the Democrats and President Obama. Should the Fed hike again in March, following a hike in December, ahead of two further hikes in 2017, it will surely attract Trump’s ire.
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.
