The Close: Fed Raises Expectations Which Pushes Markets Higher.
Markets began to rebound towards the close today after news from the Fed. The Dow closed down 45 points, or -0.15%, while attempting to rebound from it’s intraday lows. The S&P 500 closed up 6.55 points, or +0.18%. Finally, the Nasdaq closed up as well, +63.13 points, or 5/10 of a percent. Why did the market rebound? What will become of the subsequent gain? What is in store for tomorrow? All we answered here.
There was a Fed meeting today, which almost always pushes the market either up or down, which is dependent on the news given to the public. Today, the news was positive from the Fed. While the news was positive, it did not move the market nearly as much as certain unveilings. The Fed has proposed LSAP, QE, or other tools within their toolbox which have subsequently moved the market for the entirety of trading days, or even weeks. Today’s news doesn’t seem like it will have such an effect, although it's long term news which will benefit the market in the long run. The Fed announced that they have raised their growth expectation slightly, by .2%. They announced their real GDP numbers will fall at 2.4%, rather than 3.7% which the Fed proposed in September. The Fed also announced unemployment will fall this year to 6.7% rather than 7.6% which was seen in September. Finally, the Fed claims the unemployment rate will fall to 5% in 2021 rather than 5.5% which was projected. The FOMC announced they will be purchasing $120 billion in bonds, which will add to their massive amount of large scale asset purchases, or LSAP. The Fed claims inflation will continue at this level, 1.2%, but raised their estimates for 2021, and increased that 1.2% by .6% in 2021 with inflation at 1.8%. Finally, rates will remain unchanged. Interest rates were pushed to near zero in March, and while it may be excellent news for those purchasing homes, this could cause long term issues. Firstly, we may see an asset price bubble in the housing market if rates remain as low as they are now. Another big issue with allowing rates to remain unchanged, at near zero, is the neglection of bonds. What is the incentive for someone to invest in current bonds, which are at extremely low yield rates, when they can invest in stocks which offer much better returns. What many typically don’t understand is that bonds and interest rates have an inverse relationship. Meaning, when the rates go higher, the price of current bonds decrease, while the price of new bonds increase. The 10 year treasury yield is currently at 0.92%, near it’s all time lows. A year ago today, the 10 year was at 1.95%, almost 2%. Not an alltime high, as those numbers were seen during the 80s when rates were near or at 15%.
I feel as though you all may have been reading the same article for the last few days, as nothing new has changed with stimulus talks, yet again. While congress did unveil a $900 billion dollar stimulus plan, it neglects to shield businesses from potential liabilities. Senate majority leader McConnell stated that stimulus talks are still their “Top priority”. There isn’t much that is going to budge the market within the coming weeks without a stimulus package. Once that package is provided by the senate or house and acknowledged by the President, we will see quite an untick in intraday trading. The only other thing that can move the market would be an end to the virus in its entirety, which doesn’t seem likely to happen anytime soon.