U.S. equities rebounded nicely on Monday from the unpleasantness seen on Friday thanks to reassuringly dovish comments from two Federal Reserve officials — further easing the odds of a September rate hike.
In the end, the Dow Jones Industrial Average gained 1.3%, the S&P 500 Index added 1.5%, the Nasdaq Composite wafted up 1.7% and the Russell 2000 finished Monday 1.4% higher. Treasury bonds were little changed, the dollar was weaker overall, gold lost 0.7% and oil was stronger rising 0.9%.
Yield-sensitive telecom and consumer-staples stocks led the way, with gains of 2% and 1.9%, respectively. Energy were the laggards, up 0.9%. Pandora Media Inc (NYSE:P) gained 4.9% on reports it will announce a $5-a-month streaming service this week and may launch a $10-a-month on-demand competitor to Apple Inc. (NASDAQ:AAPL) Music.
Polaris Industries Inc. (NYSE:PII) lost 5% on a 42% cut to earnings guidance on sales pressure and thermal-related issues with its RZR side-by-side utility vehicles.
As a reminder, stocks were pounded lower for their worst one-day loss in months last week amid pressure in the global market for long-term government bonds. The epicenter for this was concern that the Bank of Japan could unleash a “reverse Operation Twist” to raise long-term rates (whilst lowering short-term rates further) in an effort to ease the pressure on pension funds and bank profitability.
But ongoing concern the Fed could raise rates later this month was a contributing factor as well. So today’s headlines did much to soothe raw nerves.
All eyes were on comments from dovish Fed governor Lael Brainard, who is the last Fed official to speak before the self-imposed pre-meeting media blackout period. She said the case to preemptively hike rates — before inflation has resolutely returned to their 2% target — had become “less compelling.” Brainard cited ongoing labor market flack, foreign deflationary pressure and evidence of a persistently low neutral interest rate (the secular stagnation thesis).
As a result, September rate hike odds in the futures market dropped from 24% to 15%, effectively taking the rate hike off the table unless the Fed wants to badly rattle financial markets less than two months before the U.S. presidential election. That just isn’t going to happen. The Fed has a long history of not chancing policy so close to important elections.
Moreover, most Fed officials lean Democratic (Brainard is a four-time donor to Hillary Clinton) and its common knowledge that stock market volatility would only boost GOP presidential contender Donald Trump’s chances of winning.
Checking in with Jason Goepfert of SentimenTrader, Friday’s 1%-plus decline ended a streak of more than 50 days without such a move, something that often resulted in follow-through selling over the next couple of weeks.
The S&P 500 suffered its largest drop in two months on a September Friday, something that since 1928 has led to follow-through selling on Monday five out of six times. The fact that our current situation was an exception should be viewed as a net positive.
Moreover, Friday was only the third time in history that the S&P lost two months’ worth of gains the day after being within 1% of a multi-year high. The other two occurrences were Feb. 7, 2007 and June 26, 2016. Both saw stocks bottom over the next one to four days and quickly zoom to new highs. Another similar event happened on March 6, 2012, which also marked a low ahead of new highs.
Watch for stocks to continue their upward momentum into October, at which point potential headwinds from weak corporate earnings, a possible December rate hike and rising odds of a Trump victory could rattle markets.
Edge Pro subscribers are ready to profit with positions like low-cost calls in American Express Co (NYSE:AXP), which looks ready to break above multi-month resistance near $66. Subscribers booked profits on Thursday in their ConocoPhilips (NYSE:COP) $42 calls for a 432% gain.