U.S. equities closed up nicely on Tuesday just a day before the Federal Reserve is widely expected to raise interest rates for the first time in nearly a decade. There was no specific catalyst for the move, just a general sense of relief after a series of deep selloffs.
In the end, the Dow Jones Industrial Average gained 0.9%, the S&P 500 went up 1.1%, the Nasdaq Composite jumped 0.9% and the Russell 2000 ended the day 1.4% higher. Further: Treasury bonds weakened, the dollar was stronger, gold moved lower and oil rallied for the second straight day, rising 2.1% to $37.08 a barrel.
Energy stocks led the way thanks to the rise in crude, gaining 2.9% at the sector level. Financials followed, rising 2.4%. Purse maker Coach Inc (NYSE:COH) gained 4% thanks to an upgrade note from analysts at Cowen on hopes the company can achieve positive comp-store sales growth soon.
Industrials lagged, rising just 0.1% as a group. 3M Co (NYSE:MMM) lost 6% after it reduced its fiscal 2015 organic growth guidance to 1% from upwards of 2% previously while also lowering its earnings per share guidance. Twitter Inc (NYSE:TWTR) lost 3.9% after Evercore ISI reduced estimates and lowered its price target as the company continued to lose ground to competitors such as Instagram and Snapchat.
Crude oil slid after the close, dropping West Texas Intermediate down below $37 a barrel, after a larger-than-expected inventory build of 2.3 million barrels when a draw of 1 million barrels was expected.
Some strength in the two largest high-yield bond ETFs helped, with the iShares High Yield Corp Bond ETF (NYSEARCA:HYG) gaining 1.6% and the Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) gaining 1.2%. The recent spread of bond market weakness to investment-grade garnered some attention from Goldman Sachs, which noted that the weakness in IG bonds relative to equities (which have outperformed by 4% over the past two weeks) is worth monitoring since it suggests stocks have some downside risk.
On the economic front, the November consumer price inflation report came in largely as expected, rising at a 0.5% annual rate while the core rate is rising at a 2.0% rate. The positive momentum increases the odds the Fed pulls the trigger on a rate hike tomorrow.
It’s going to be a busy day. According to Bank of America Merrill Lynch’s Michael Hanson, with a rate hike all but certain, focus will be on whether the Fed can deliver a “dovish hike” that combines the start of a tightening campaign with a promise to be very gradual with the pace of any subsequent hikes.
Currently, the futures market is only looking for just 1.8 hikes in 2016 while Hanson expects the Fed’s latest “dot plot” summary of individual forecasts to show four rate hikes next year — which is only half of the average pace of the prior several rate hike cycles. It will be tough for Fed chairman Janet Yellen to hit that market’s dovish expectations while maintaining a commitment to data dependency amid a steady pace of job gains.
Buckle up, because tomorrow is going to be a wild ride.
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.
