U.S. equities moved higher on Thursday as investors responded to the Federal Reserve’s dovish hold. On Wednesday, the Fed lowered its rate hike forecast for 2016 to two quarter-point hikes. Policymakers blamed global economic uncertainties and financial market volatility for their caution.
But with core inflation heating up and the labor market tightening, the chatter is that the Fed is risking falling behind the curve on inflation — it’s “credibility” on inflation being a focus of the post-announcement press conference Wednesday.
In the end, the Dow Jones Industrial Average gained 0.9%, the S&P 500 rose 0.7%, the Nasdaq Composite added 0.2% and the Russell 2000 finished the day off 1.6% higher. Treasury bonds were mixed, the dollar was sharply lower, gold gained 2.8% and crude oil gained 4.2% to close at $40.07 a barrel — returning to levels not seen since early December.
With the focus on commodities and precious metals, materials stocks led the way with a 2.1% gain, with energy stocks up 1.4%. FedEx Corporation (NYSE:FDX) gained 11.8% after reporting a fiscal third-quarter earnings beat on strong revenues and profit margins.
Chipmaker Advanced Micro Devices, Inc. (NASDAQ:AMD) gained 6.5% after Bloomberg reported Intel Corporation (NASDAQ:INTC) is in advanced talks to acquire its graphics technology.
Healthcare stocks were once again the laggards, down 1.1% as biotech names remain a drag. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) fell 11.5% on a Reuters report creditors are pushing for better terms. Chipotle Mexican Grill, Inc. (NYSE:CMG) fell 5.8% on a downgrade from Jefferies concerned about turnaround efforts following a food contamination scare taking longer and costing more than expected.
Amazon.com, Inc. (NASDAQ:AMZN) dropped 2.6% to test support at its 200-day moving average, boosting the April $560 puts recommended to Edge Pro subscribers to a gain of nearly 50% since Wednesday.
On the economic front, initial weekly jobless claims increased slightly from last week, but still managed the 54th consecutive week below the 300,000 level, the longest stretch since 1973. The Job Openings and Labor Turnover Survey was mixed, showing a surge in January job openings (to 5.54 million), but a drop in hiring and a slight decrease in the quits rate.
There was some strong manufacturing data, with the Philly Fed jumping to its first positive reading in seven months.
Looking ahead, a massive technical resistance pattern lies just overhead near Dow 18,000. The stimulus-addicted bulls seemingly got what they wanted from the Fed, suggesting an upside breakout is coming. But a steady rise in inflation could very well pressure policymakers into a more aggressive tightening path later this year — something that will not be well tolerated by those hooked on the monetary morphine.
JPMorgan economist Michael Feroli is looking for two rate hikes this year at the July and December meetings. If so, this would be slightly ahead of market expectations, a possible source of disappointment. But even this could be a best-case scenario for traders, as Feroli notes that “recent solid employment and inflation data may argue for a hike earlier than July.”
The team at Capital Economics is also looking for the Fed to turn more hawkish soon, with an expectation for a June rate hike followed by an acceleration in inflation that will “force the Fed to raise rates much faster than is widely appreciated.”
This outlook, predicated on hard economic data, could be enough to push stocks away from current levels and result in a retest of recent lows near Dow 16,000, as the specter of even higher interest rates later this year sinks in.
How high? Steve Murphy at Capital Economics is looking for as much as 1.25% by year-end 2016, and as much as 2.5% by year-end 2017.
Other warning signs include a slight narrowing of market breadth in recent days, a sign that the buyers are focusing on a narrowing list of stocks while many others — especially biotech, small-caps, and financials — get left behind.
In fact, despite the day’s impressive gains, 45 fewer stocks on the New York Stock Exchange moved higher compared to Wednesday, and about 600 fewer moved higher than what was seen during the strong rebound rallies of January.
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.
