Stock Market Today: Stocks Maintain Gains After Fed Signals 2022 Rate Hike
The Federal Reserve didn't pull the tapering trigger Wednesday, but its members did suggest a rate hike could be on tap as early as next year.
The Federal Reserve threw Wall Street something it was expecting – but also mixed in a curveball – following Wednesday's conclusion of the latest Federal Open Market Committee (FOMC) meeting.
The Fed, as expected, said it wasn't quite ready to announce the start of tapering but made it clear that action was on the horizon.
"If progress [on maximum employment and price stability goals] continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," the central bank said in a release. Many strategists believe the Fed will make its move in November or December.
More startling was that the Fed's latest "dot plot" – a chart illustrating FOMC participants’ expectations for where interest rates will be in the future – now projects a 0.5-percentage-point uptick in the Fed funds rate by late 2022.
"The lack of a formal taper announcement is clearly dovish, compared to a somewhat surprising hawkish dot plot, which now increases the odds of a rate hike in 2022," says Cliff Hodge, chief investment officer for Cornerstone Wealth. "This accelerated timeline is firmly ahead of consensus expectations for the first hike to not occur until 2023."
Michael Gregory, deputy chief economist for BMO Capital Markets, provides additional detail on the dot plot:
"The median projection now includes a 0.5-point rate hike for this year compared to none before (2 of the 11 in June's no-move camp jumped on the one-hike bandwagon)," he says. "And, it now has 75 bps worth of tightening in 2023 instead of 50 bps before, with only one no-rate-hike holdout. The inaugural dots for 2024 show a further 75 bps of tightening to a 1.75% endpoint, with, as expected, no one left in the no-change camp."
The Dow Jones Industrial Average (+1.0% to 34,258), which already was enjoying a strong up day, fought through some volatility after the release but held on to its gains. The S&P 500 (+1.0% to 4,395) and Nasdaq Composite (+1.0% to 14,896) followed suit.
Other news in the stock market today:
- The small-cap Russell 2000 jumped 1.5% to 2,218.
- FedEx (FDX, -9.1%) suffered a steep drop in the wake of a disappointing earnings report that included a cut to its 2022 guidance. While the shipping firm exceeded revenue estimates with $22 billion worth of sales in the first quarter of its fiscal 2022, its $4.37 per share in profits was well shy of analyst expectations for $4.88 per share. That led FedEx to drop its full-year profit guidance to $20.38 per share from $21.00 previously – even farther short of the consensus estimate for $21.13. Of particular note were significantly smaller August-quarter EBIT (earnings before interest and taxes) margins of 8.2% versus 6.7% of last year. "This should be temporary, though, as severe labor shortages that are causing FDX to reroute shipments around understaffed hubs will taper as the pandemic wanes, in our view, alleviating excess shipping and overtime costs," says CFRA analyst Colin Scarola, who dropped his 12-month price target to $335 per share from $357 but maintained a Strong Buy rating on shares
- Facebook (FB) fell 4.0% today after the social media giant said it is underreporting Apple (AAPL) iOS web conversions by roughly 15%. This, according to Facebook VP of Product Market Graham Mudd, is because recent "platform changes" – namely AAPL updating its iOS earlier this year to allow users to opt out tracking – has made it harder to measure the performance of advertising campaigns. "We're optimistic about our multi-year effort to develop new privacy-enhancing technologies that minimize the amount of personal information we process, while still allowing us to show personalized ads and measure their effectiveness," he wrote in a blog, while adding that these efforts "will take time."
- A seventh-straight weekly decline in domestic crude supplies sent U.S. crude oil futures surging 2.5% to $72.23 per barrel.
- Gold futures eked out a marginal gain to settle at $1,778.80 an ounce.
- The CBOE Volatility Index (VIX) plunged 13.9% to 20.97.
- Bitcoin rebounded 3.4% to $43,428.16. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)
Have Investors Dodged a Bullet?
Monday's fears that China's Evergrande could turn into another Lehman Brothers-esque meltdown has – if stocks' motion since then is any indication – all but vanished, at least for the moment.
That doesn't necessarily mean investors are in the clear.
Brad McMillan, chief investment officer for Commonwealth Financial Network, noted earlier this week that "the Evergrande news is probably the trigger, but not the cause, of the small pullback we have seen." Indeed, the market has gone months without a significant drawdown, and risks remain, including high stock prices, COVID concerns and a looming debt ceiling.
So don't be fearful, but stay on guard.
Those looking for protection might consider the sturdy blue chips of the Dow Jones Industrial Average, or low-volatility strategies that prioritize defense.
A little pruning might be in order, too. A broad market decline doesn't punish all equities equally – particularly expensive stocks frequently bear the brunt of the selling. We've recently evaluated 10 stocks that might be on a precarious perch – while there are no glaring faults in their underlying companies, a combination of mediocre growth prospects and sky-high valuations make them appear especially vulnerable to a steep fall.