Stocks finished with mixed reactions on Thursday after posting some impressive mid-day gains spurred largely on dovish comments from St. Louis Federal Reserve Bank President James Bullard.
Bullard has a well-earned reputation for stepping in at key moments of market fear (notably, during the 2014 Ebola scare). And sure enough, just before the open amidst overnight selling pressure that took the Dow Jones Industrial Average down more than 200 points, he went on CNBC to tell the world he didn’t believe the Fed should raise rates in four quarter-point increments this year “unless everything goes perfect.”
This was motivated by Wednesday’s Fed meeting minutes, which raised the specter not only of four quarter-point hikes but possibly even five (as highlighted by Goldman Sachs economists) as economic growth, inflation and labor trends all heat up.
Stocks opened strong, extended at mid-day, but succumbed to another bout of late-session selling pressure as large-caps continue to hit technical resistance at the 50-day moving average.
In the end, the Dow Jones gained 0.7%, the S&P 500 gained 0.1%, the Nasdaq Composite lost 0.1% and the Russell 2000 lost 0.1%. The Nasdaq’s decline represented the longest pullback in 15 months.
Treasury bonds rallied a little, pushing down yields. Crude oil and gold gained. And the U.S. dollar weakened. Breadth was mixed, with advancers just edging out decliners, but there were 80 new lows on the NYSE vs. 32 new highs.
Coal and oil equipment stocks led the way amid some rotation out of tech stocks and into materials, with gains of 2.4% and 2.2%, respectively. Transportation services stocks were hit hardest, down nearly 9%. Snap Inc (NYSE:SNAP) lost 7.5% after Kylie Jenner said she doesn’t use the service anymore after an app redesign designed to attract all-new users alienated its existing userbase.
After the close, HP Inc (NYSE:HPQ) surged nearly 8% in extended trading after reporting better-than-expected quarterly results.
Conclusion
In addition to Bullard, Dallas Fed President Kaplan admitted that while the U.S. labor market was getting very tight, the rate hike path should remain slow and gradual. He said three quarter-point hikes this year was a good base case as labor market tightness has yet to fan wage inflation.
Years of extreme policy dovishness from the Fed will be hard to kill. And it will only be when there is clear and undeniable evidence of both wage gains and overall inflation pressure that they will be forced to change their tune.
The bond market — and thus, the stock market — isn’t waiting around and can already sniff out a turn. That’s why the response to the January jobs report and the jump in wage growth it contained was so severe. The economy is running hot. Above capacity, in fact, at a time when fiscal stimulus from the Trump tax cuts and a deficit-deepening spending bill is just pouring gasoline all over it.
Inflation is here. Finally. And the Fed doves are in denial.
But Bullard and Kaplan have a good reason to try to step in here because a failed test of the S&P 500’s 50-day moving average — which is looking increasingly likely here — could result in a new bear market according to Jason Goepfert at SentimenTrader. He finds that when stocks fail to hold this level after suffering a correction, stocks are down an average of 6.4% three months later with the pattern preceding the 1929, 2000 and 2008 bear markets.
Check out Serge Berger’s Trade of the Day for Feb. 23.
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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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
