U.S. equities came oh-so-close to pushing the Dow Jones Industrial Average over the 20,000 threshold for the first time ever on Wednesday, but volatility and selling pressure in the wake of the announcement of a 0.25% interest rate hike by the Federal Reserve rendered it a futile effort.
It was the first tightening move of the year and only the second of the cycle so far following the December 2015 rate hike. Before that, the Fed hadn’t raised rates since 2006. And while the move was well expected in the wake of a post-election market surge, a rebound in corporate earnings growth, and a flow of better economic data, a more aggressive rate hike forecast for 2017 gave investors pause.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 lost 0.8%, the Nasdaq Composite lost 0.5% and the Russell 2000 lost 1.3%.
Treasury bonds were weaker, the dollar surged massively against the yen, gold gained 0.4% and crude oil fell 3.9% on the dollar as well as growing concerns about a demand slowdown and the enforcement of the recent OPEC/non-OPEC production freeze deal.
The rise in long-term interest rates, and thus the weakness in long-term Treasury bond prices, boosted the ProShares Ultra Short Treasury Bond (NYSEARCA:TBT) recommended to Edge subscribers by 2.3% to bring its total gain to 36% since recommended in August.
Technology stocks led the way by limiting their decline to 0.3%. Energy was the laggard, down 2.1%. Exxon Mobil Corporation (NYSE:XOM) fell 2.2% but not before Edge Pro subscribers sold their $88.50 and $88 December XOM calls for gains of roughly 200% since recommended on Nov. 15 and Nov. 30.
On the economic front, headline retail sales missed expectations with a 0.1% monthly rise in November following a 0.6% gain in October. Analysts were looking for a 0.3% rise on strong auto sales, which instead fell 0.5% for their worst reading since March. Inflation picked up with the headline producer price inflation index up 0.4% in November vs. October’s flat reading for the largest month-over-month increase since June. The 1.2% year-over-year gain was the largest since November 2014.
And on the political front, President-elect Donald Trump held his meeting with Big Tech CEOs from the likes of Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) among many others. The focus of the meeting was on how to bring high-paying jobs back to the United States. The industry already seems to see the writing on the wall with International Business Machines Corp. (NYSE:IBM) CEO Ginni Rommety writing an op-ed in USA Today touting plans to hire 25,000 people in the U.S. and invest $1 billion over the next four years in “new collar” jobs via new employee vocational training.
But more than that, the meeting will provide a chance to patch up relations between one of the fastest growing, most dynamic sectors of the economy and the incoming Trump Administration — two groups that were often at odds with each other during the heated campaign season. While disagreements may linger on issues like net neutrality, “fake news” censorship and immigration common ground on issues like corporate tax cuts and capital repatriation may well be found.
Optimism over the positive impact of tax relief has driven a rebound in Big Tech stocks this week.
Back to the Fed.
The Federal Open Market Committee voted unanimously to raise rates justified by higher inflation expectations and an improved economic outlook. The biggest change, however, was the Fed’s increase in 2017 rate hike expectations to three quarter point hikes versus the two quarter point hikes that were seen in September.
This, along with Yellen’s statement in her press conference that Trump’s fiscal plans may be too much too late in the business cycle — and thus, could be inflationary — could further fuel the expectation the Fed is about to turn hawkish.
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.
