U.S. stocks moved lower on Wednesday to close near the worst levels of the session after Federal Reserve chair Janet Yellen sounded a hawkish note at a speech in Washington D.C., talking up the economic risks of waiting too long to raise interest rates.
Also weighing on sentiment was a breakdown in crude oil prices as OPEC looks unable to muster a production cut ahead of a quota meeting on Friday. Reports are that Iran, along with a majority of OPEC countries, are in favor of a production cut, but Saudi Arabia and its Persian Gulf allies remain in favor of continuing their market share ware against U.S. shale oil producers.
A larger-than-expected crude oil inventory build didn’t help matters either.
In the end, the Dow Jones Industrial Average lost 0.9%, the S&P 500 lost 1.1%, the Nasdaq Composite lost 0.6%, and the Russell 2000 lost 1%. Treasury bonds weakened, the dollar moved higher but off of its intra-day highs, and gold moved lower. Crude oil lost 4.1% to close at $40.12 per barrel.
The drop in crude oil hit energy stocks hard, pushing the group down 3.1%. Exxon Mobil (XOM) lost 2.9% while Chevron (CVX) lost 2.4%. Technology issues were strong, limiting their decline to 0.6% as a group thanks to a 5.8% rise in Yahoo! (YHOO) on reports it could be considering the sale of its core business. QUALCOMM (QCOM) gained 5.2% on news of a China patent license agreement.
On the economic front, the November private sector ADP jobs report was solid, with a headline gain of 217,000 the best result since June. Heading into Friday’s government non-farm payroll report, the consensus estimate is for a 200,000 job gain.
Coming back to Yellen, Michael Feroli at JPMorgan wrote in a note to clients that the big takeaway from today’s comments was that the conditions for a December rate hike were falling into place. Specifically, Yellen mentioned that gains in the labor market had “bolstered” and “strengthened” her confidence that inflation would return to the Fed’s 2% target over time.
This was the critical ingredient missing from the September meeting. The news suggests that, save a major disappointment with Friday’s jobs number or major financial market volatility, we’re on the verge of the first rate hike since 2006.
Investors, for their part, have been responding with fear whenever Yellen reinforces a December rate liftoff — setting the stage for further downward pressure on stock prices as we head into the December 16 policy announcement.
In response, defensive assets are poised to outperform: The VelocityShares 2x VIX (TVIX) recommended to Edge subscribers gained nearly 7% today.
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.
