After The Close - The futures markets started out positively today, as sentiment improved concerning a potential rate cut from the U.S. Federal Reserve. This uptick continued into the early portion of trading and the Dow Jones Industrial Average eclipsed the 27,000 mark, while the other composites reached higher. However, this was slightly short-lived after the inflation data showed a slight pickup, which caused traders to speculate that a smaller rate cut was likelier, and the indices started to fall. In fact, the S&P 500 and NASDAQ briefly traded in the red for a spell. Then, the indices rebounded, started trading to the upside, and the Dow made an all-time high at 27,088.45. Overall, the day could be characterized by several short-term trends, but the change from breakeven levels was not large, except in the case of the Dow. All told, the Dow closed higher by 228 points, while the S&P 500 was up around seven points but the NASDAQ eased.
Additionally, market breath was mixed today, as advancers and decliners did not outnumber each other by a large amount. Industrial stocks were among the strongest performers of the day, while REITS were among the weakest. This outcome was likely caused by changes in interest rates.
In commodity news, oil prices were largely on par with yesterday’s closing price, as the storm system in the Gulf of Mexico formally became Tropical Storm Barry. This is likely to impact the waters near Louisiana and may disrupt oil supplies over the coming days. Meantime, U.S. Treasury bond yields were higher almost across the board, as expectations for future inflation rose. The market earlier had been pricing in a 50-basis point drop in interest rates at the Fed’s meeting in July, before last Friday’s jobs report. However, today’s inflation data caused traders to move further away from this position.
The VIX Volatility Index ended the day around breakeven, suggesting little change in demand for options protection.
Looking ahead, tomorrow will have fewer economic reports as only the Producer Price Index for June is slated for release. Meantime, it will be quiet on the earnings front. This suggests that tomorrow’s trading will be more heavily dependent on changes in sentiment, and any trade developments that arise. - John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell - Wall Street, which generally meandered about to the downside the past three sessions, suddenly got a nice jolt upwards yesterday morning, as Federal Reserve Chair Jerome Powell signaled that an interest-rate cut was coming when the central bank gathers to make its monetary mind up on July 30th and July 31st. The guessing for weeks had been that the Fed would trim rates in three weeks. Until last Friday, though, there had been some forecasting a 50-basis-point drop in borrowing costs. A strong employment report released at that time seemed to dash such expectations. Now, a 25-point reduction would appear likely.
This signal from The Fed Chair really helped the market to get rolling, and within minutes after the open, the Dow Jones Industrial Average. His testimony before the House (he will be interviewed by the Senate this morning), in fact, helped the blue chip index to rise by 200 points very quickly. Also, the S&P 500 Index broke above the 3,000 mark for the first time ever. The NASDAQ also shot up, soaring by some 85 points early on. However, those levels could not be sustained, and as we approached the two-hour mark of the trading session, the Dow had given back much of its earlier gains.
Regarding the Powell testimony, the Chair opined that the economic outlook had not improved in recent weeks. He further intoned by declaring that "it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Breaking the market's early showing down, we saw that energy and technology were outperforming, with Dow component Chevron (CVX – Free Chevron Stock Report) a full participant in the early upswing. As to the market, in general, it was being driven by the Fed Chair's clearly dovish tone.
The market then would weaken somewhat further, before turning up sharply for a second time during the session, with the Dow climbing up by some 150 points in early afternoon, before backing off again. To be sure, an interest-rate reduction now appears even more likely following Mr. Powell's testimony, and that is certainly helping the bullish case. But the Fed Chair did not suggest that there would be further rate cuts forthcoming. Our thinking is that the Fed will act to lower rates for a second and possibly third time in 2019 if the economy falters further. That scenario is uncertain at this time.
The market then marched into the session's final hour with the Dow still up by more than 60 points, while the S&P 500 was ahead 11 points, but was holding below 3,000. The NASDAQ, meantime, was continuing to outperform, climbing close to 50 points. The positive stock market tone then would continue through the balance of the afternoon, and while no further runs to new highs would be in the offing, the backdrop remained solidly positive. In all, the Dow would finish matters ahead by 77 points; the S&P 500 Index would climb 13 points; and the NASDAQ conclude matters ahead by 61 points, clearly leading the way yesterday.
Now, with the Fed Chair's House testimony out of the way, he will head before the Senate this morning, where we would assume little will change from yesterday. Before all of that takes place, we see that the major indexes were higher in trading in Asia in the overnight hours, while in Europe, the key bourses also are showing early gains. Also, oil prices, up yesterday, are rising anew on the storm threat in the Gulf of Mexico thus far this morning and Treasury note yields, which closed at 2.06% yesterday now are at 2.05%. All of this is suggesting that the U.S. equity market will start the current session to the plus side when trading resumes this morning. – Harvey S. Katz, CFA