U.S. equities moved lower on Wednesday as a solid ADP employment report and hawkish testimony to Congress by Federal Reserve chairman Janet Yellen raised the odds of a December interest rate hike — the first policy tightening move since 2006.
While Fed hawkishness was seen as a positive recently (oh, the economy must be strong!) investors are starting to have doubts whether the end of the near-zero interest rate policy will really be so benign as futures market odds surge towards 60% (up from a low of 26% during the market turmoil of early October).
In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 slumped 0.4%, the Nasdaq Composite dipped 0.1% and the Russell 2000 shed 0.1%. The U.S. dollar was stronger, gold lost 0.7% to fall to a seven-week low and crude oil slid 2.9% to close at $46.53 a barrel.
Defensive utility stocks led the way with a 0.4% gain. Tesla Motors Inc (NASDAQ:TSLA) gained 11.2% after reporting in-line Q3 deliveries, better-than-expected gross margins and Q4 delivery guidance that was ahead of consensus.
After the close, Facebook Inc (NASDAQ:FB) reported better-than-expected earnings of 57 cents per share vs. the 52 cents analysts were expecting. Revenues came in at $4.5 billion vs. the $4.4 billion expected. Daily average users increased 17% over last year to 1.01 billion … that’s a lot of memes and baby pics. Shares jumped 2.3% in after-hours trading.
Financial stocks were the laggards, losing 0.4%. Groupon Inc (NASDAQ:GRPN) was slammed 26.3% after missing on Q3 revenue as well as 2016 revenue and operating profit guidance. Avon Products, Inc. (NYSE:AVP) lost 20% on an unexpected quarterly loss and inventory build. And United States Steel Corporation (NYSE:X) fell 14.5% on weak quarterly results and lowered guidance on weak steel pricing.
Back to Yellen.
Before the House Financial Services Committee, she suggested that a December rate hike was a “live possibility” if economic data suggests growth will continue to support improvement in the labor market and a move in inflation back towards its 2% target. She stressed, however, that no decision has been made.
But brushing off the weak September payroll report — citing evidence of labor market slack diminishing significantly — made her overall tone more hawkish than usual.
On the economic front, the ADP private payroll report increased 182,000 in October, largely in line with the consensus estimate yet slightly below September’s 190,000 pace. Separately, the ISM non-manufacturing activity report surprised to the upside, increasing to 59.1 vs. the 56.7 expected and September’s 56.9 result.
Thursday will feature another heavy schedule of Fed speakers before Friday’s all-important October job report hits. Analysts are looking for payrolls to expand by 190,000 with the unemployment rate falling to 5.0% — which would represent a return to the growth last seen in July.
All this is coming at a time when Wall Street strategists, according to the folks at SentimenTrader, are feeling pretty confident despite the risk of the first interest rate hike in nearly a decade. They’re pricing in another 3% gain through year end — a typical Santa Claus rally. Such end-of-year optimism was last seen in 2011, after which the market basically flatlined.
Since 1999, such optimism at year-end typically led to subdued market performance. Pessimism is better, of the type seen in each of the last three years when the market gained 1.0%, 5.2% and 2% respectively between October and December.
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.
