U.S. equities suffered a wild ride on Wednesday, initially surging higher thanks to a stronger-than-expected payroll report — lifting expectations for Friday’s jobs figures.
ADP reported 263,000 jobs created in March versus 170,000 expected, and even exceeding the 245,000 reported for February. But then, the release of hawkish minutes from the Federal Reserve’s March meeting crushed sentiment, pushing large-caps into the red on concerns policymakers are worried about lofty financial asset valuations (read: stocks are too expensive and bubbly) and could thus start normalizing their $4.5 trillion balance sheet before the end of the year.
As a reminder, before the financial crisis, the Fed’s balance sheet totaled around $1 trillion. Bringing it back to normal, by allowing asset purchased during multiple rounds of quantitative easing, will quickly dry up liquidity in the capital markets.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.6% and the Russell 2000 lost 1.2%. Treasury bonds were stronger, the dollar was weaker, gold lost 0.8% despite the risk-off dynamic in play and crude oil couldn’t hold early strength and finished lower.
Defensive utility stocks led the way with a 0.56% gain. Financials were the laggards, down 0.7%. Total NYSE volume of 942 million shares was 105% of the 30-day average. And breadth was negative, with decliners outpacing advancers on the NYSE nearly 2-to-1.
Weakness in the bank stocks — a leading sector group over the last few months — bolstered the ProShares UltraShort Financials (ETF) (NYSEARCA:SKF) recommended to Edge subscribers by 1.1%.
Panera Bread Co (NASDAQ:PNRA) gained 14.2% after announcing it would be acquired by JAB for $315 a share in cash in a $7.5 billion deal. Monsanto Company (NYSE:MON) climbed 1% on a fiscal second-quarter earnings per share beat of 14% on revenues that were 7% ahead of estimates.
Turning back to the Fed, other than a boring discussion of how exactly to normalize its balance sheet (phase out reinvestments in increments or all at once?), the big takeaway was color on how overextended many policymakers view the stock market. Some viewed prices as “quite high,” which is a remarkable turn from the years of ultra-dovishness and coddling investors have grown accustomed to.
Remember in 2014 when Fed Board Chair Janet Yellen warned of stretched valuations in key Big Tech and biotech stocks and caused a selloff in said names? She quickly dumped this “verbal guidance” in subsequent speeches, clearly pointing to the Fed’s priorities.
It’s also worth noting that President Trump accused the Fed of being a political entity, holding stocks higher artificially by holding interest rates so low for so long under President Obama. He warned that after the election, interest rates would be jacked higher. That’s happened, with two rate hikes since Election Day versus the prior pace of two hikes over ten years.
Should the Fed’s policy hawkishness — admittedly, coming very, very late in the business cycle — continue and torpedo stock prices, Trump is likely to push back.
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.