Stocks sold off sharply in early trading after a mixed August inflation report appeared to take a jumbo-sized rate cut off the table. But a rally in mega-cap tech names helped equities rebound by session's end.
Wednesday got off to an anxious start as traders and investors were particularly keen to see the August Consumer Price Index (CPI), which was released before the opening bell.
Market participants expect the Federal Open Market Committee (FOMC) to bring interest rates down from a 23-year high at the next Fed meeting. The question is whether the central bank will reduce the short-term federal funds rate by 25 basis points (a quarter of a percentage point) or 50 basis points (0.50%).
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After Wednesday's econ news, a quarter-point cut is the odds-on favorite. August CPI increased 0.2% on a monthly basis, according to the Bureau of Labor Statistics, which matched economists' estimates. However, core CPI, which excludes volatile food and energy costs and is considered to be a better indicator of future prices, rose 0.3%. That topped expectations for a 0.2% increase and made markets somewhat uneasy.
"The economy is in the driver's seat, not the Fed," wrote Scott Helfstein, head of investment strategy at Global X. "That is a good thing. Stabilizing prices, solid market and strong corporate performance set the stage for a further market advance as the Fed moves to lower rates."
Helfstein added that a 25 basis point rate cut in September "is the most likely outcome."
By session's end, interest rate traders assigned an 87% probability to the central bank cutting the fed funds rate by a quarter-point at its next confab, up from 66% a day ago, according to CME Group's FedWatch Tool. Odds of a half-point cut fell to 13% from 34% the prior day.
"Equity players pressed sell following the CPI release, because they are worried that the Fed may be too late in providing relief," writes José Torres, senior economist at Interactive Brokers. "Still, stock bulls should favor a slow and controlled vertical walk down the monetary policy stairs rather than a speedy and turbulent roll south to lower stories."
The bottom line? Anxious recalibrations of rate-cut bets sparked a rally in tech and consumer discretionary stocks, while consumer staples, energy and financials sold off. At the closing bell, the blue chip Dow Jones Industrial Average was up 0.3% at 40,861, while the broader S&P 500 gained 1.1% to 5,554. The tech-heavy Nasdaq Composite rallied 2.2% to end at 17,395.
Stocks on the move
Bank of America (BAC) stock slipped 0.7% after Warren Buffett's Berkshire Hathaway (BRK.B) disclosed another large sale of its position in the banking giant.
Regulatory filings showed Berkshire Hathaway sold about 5.8 million Bank of America shares, with the selling price ranging between $39.29 and $39.67 per share. The selling started on September 6 and ran through September 10.
All told, Berkshire Hathaway sold about 174.7 million shares of BAC stock over that time frame for roughly $7.2 billion, bringing its holding to 858.2 million shares. This knocks Bank of America down to the third-largest position in the Berkshire Hathaway equity portfolio, with the financial stock now perched behind Apple (AAPL) and American Express (AXP). Prior to the stock sales, Bank of America was Buffett's second-largest holding.
Dave & Buster's Entertainment (PLAY) rose 4.7% after the restaurant and gaming company reported mixed earnings results for its second quarter though it achieved positive growth on both the top and bottom lines.
Dave & Buster's shares are down more than 45% for the year to date, but Wall Street is bullish on the consumer discretionary stock.
According to S&P Global Market Intelligence, the average analyst target price for PLAY is $52.71, giving shares implied upside of nearly 80% to current levels. Additionally, the consensus recommendation is Buy.
With sales in decline, GameStop sells more shares
GameStop (GME) stock plunged 12% after the video game retailer reported mixed results for its second quarter … and disclosed an at-the-market offering of up to 20 million shares of its common stock.
When a company announces a stock offering, it often leads to a decline in its share price over concerns of dilution. A stock offering increases the number of shares available in the market and reduces the ownership percentage of existing shareholders. The dilution also negatively impacts a company's earnings per share since there are more shares outstanding.
A stock offering can also cause concern because it shows that the company needs additional capital and is willing to dilute existing shareholders to raise it.
GameStop also announced an acceleration to its store closure plans.
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