Federal Reserve Chairwoman Janet Yellen testified to the Senate banking committee on Tuesday. As part of her comments, she suggested that it would be “unwise” to delay further rate hikes. This doesn’t mean that another quarter-point rate hike in March is a 100% probability, but it certainly increases the odds for a near-term change.
The CME tracks interest rate hike expectations expressed through future’s prices with their “FedWatch” tool. As you can see below, the probability of a hike in March increased from 13.3% to 17.7% following her comments. That may not sound like much of a shift, but it is enough to push bond yields and borrowing costs higher. The market is pricing in a better than 50% probability of at least one rate hike happening by the FOMC meeting on June 14th.
CME Group, FedWatch Tool
A higher rate is good for financial stocks but tends to drag on dividend payers because it lowers the present value of future dividends. Financial stocks benefit because the difference between the bank’s cost of money versus the rates they can earn from lending widens. This good news for the financial sector is adding to already robust enthusiasm around a roll-back of financial regulations like the “Fiduciary rule” that makes it more difficult for financial advisors to charge commissions.
As you can see in the chart below, stocks like Bank of America Corp (NYSE:BAC) have broken out of consolidations following today’s positive interest rate news. We suggest that investors use a “measure rule” to create short-term price targets for banks like the one we applied to the chart of BAC.
Bank of America (BAC) 2-day Candles – Chart Source: TradingView
The S&P 500 and Nasdaq Composite were up 0.39% and 0.32% respectively while the financial-heavy Dow Jones Industrial Average led the day with a 0.45% gain. We are still concerned that small-cap stocks (represented by the Russell 2000) haven’t met or exceeded the same percentage gains of the large-cap indexes over the last week, but we wouldn’t characterize this as a true divergence yet.
Conclusion: Today’s positive reaction to Chair Yellen’s testimony about a rate hike is a good indication that the bulls are still in control of the market. However, the fact that oil has not really continued its breakout and there haven’t been any real gains in European equities should justify a cautious outlook in the short term. The outperformance in the value-weighted indexes, like the S&P 500, should justify an emphasis on fundamentals through the end of the first quarter.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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