U.S. equities danced around the unchanged line — amid lingering fears about President Trump’s pro-growth agenda as well as hawkish commentary out of the Federal Reserve — despite an energy-sector surge driven by a smaller-than-expected oil inventory build.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 gained 0.1%, the Nasdaq Composite gained 0.4% and the Russell 2000 gained 0.3%. Treasury bonds were stronger, the dollar was mostly higher, gold lost 0.2% and crude oil gained 2.4%.
Never mind that U.S. shale production has pushed output to 14-month highs. Or that overall U.S. crude inventories have soared to record levels. A modicum of good news on the supply side was all it took to drive energy prices higher as hedge funds and other institutional traders jump in.
A similar dynamic is in play in energy stocks, which have drifted lower in recent months on growing apprehension about OPEC’s supply freeze agreement late last year.
The sector led the way today with a 1.2% gain. The latest is that the oil sheiks are looking to extend that agreement despite a loss of market share, as U.S. producers ramp up in response to the recent recovery in oil prices.
Some of this feels like a short-covering squeeze, considering the medium-term headwinds facing oil and energy stocks. But that doesn’t mean oil can’t swing higher here to test the upper end of its recent sideways channel.
Financials were the laggards, down 0.5%.
Restoration Hardware (NYSE:RH) climbed 15% thanks to strong quarterly results and upbeat guidance. Dunkin’ Brands Group Inc (NASDAQ:DNKN) lost 2.1% on a downgrade from Goldman Sachs on risks to same-store sales growth. After the close, Lululemon Athletica inc. (NASDAQ:LULU) lost more than 18% after issuing very weak forward guidance, anticipating a mid-single digit same-store sales decline.
And finally, turning to Fed speak, Boston Fed president Rosengren said his base case was for four rate hikes this year to avoid creating an “over hot” economy that would then necessitate an even more rapid pace of policy tightening.
Elsewhere, San Francisco Fed president Williams said the economy was very close to hitting the Fed’s employment and inflation goals. He said that another two rate hikes this year was has main view, but that upside risks means he couldn’t rule out another three hikes or more.
With the Fed growing increasingly nervous about market froth, stretched valuations and the concern this will lead to financial instability, watch for continued “verbal tightening” like this as we head into the June policy meeting — presenting a major headwind to stocks going forward.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Redeem by clicking the links above.