Investor Complacency Following Fed News

Investing

Market Moves

Stocks closed slightly higher today among large-cap stock indexes. The S&P 500 (SPX), the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) all lifted toward new highs after the Fed decision left rates unchanged today. The Russell 2000 (RUT) small-cap index was slightly below yesterday’s change, and the Russell Microcap index (RUMIC) was higher by one-quarter of one percent. 

The market had expected the Federal Open Market Comittee (FOMC) to hold interest rates unchanged; however the committee members’ sentiments expressed confidence that employment conditions would remain favorable, inflation would remain low, and interest rates would likely need not change for the entire duration of 2020 (see chart of the Fed’s dot-plot below). The market did not react to such news in a big way, but subtle indications suggest that more buyers may enter the market in the days to come.

Odd Mix of Technology and Utility Stocks Lead after Fed

The chart below shows a one-minute breakdown by sector of how stocks responded after the Fed announcement. The two sectors leading out, with just over 30 minutes to go before the market close, were technology and utilities. This unlikely pair shows how investors immediately began to place money into sectors that would gain benefits from continued low interest rates. 

The losers in this scenario turned out to be the stocks in the financial sector, where the businesses stand to benefit from rising interest rates or interest rate differentials. Astute investors will recognize that this is a likely clue signalling which stocks may perform well in the days and weeks ahead.

Subtle Signal Found in Interest-Rate Sensitive Sectors

Another indication involving the utility sector stocks seems to indicate that investors will be likely to lift stock prices higher in the next several weeks. The chart below shows a comparison of relative strength between two sectors that are typically influenced by interest-rate decisions. Utility stocks tend to fall as interest rates rise, and the basic-materials sector stocks tend to fall as inflation wanes. Comparing the relative strength of these two sectors should prove insightful.

Using State Street’s utility-sector index ETF (XLU) and comparing it with the basic-materials-sector index ETF (XLB), we can see an interesting pattern emerge. The chart features a five-day moving average (green line) on the comparison line in the upper panel, and the S&P 500 ETF (SPY) in the lower panel. As the green line makes a turn down, it seems to signal a rise to follow in SPY, while a turn up presages a drop. Since this line has made a double-turn down, it may be an indication that investors are preparing to move money from more conservative investments to more opportunistic trades.

The Bottom Line

Stocks moved slightly higher after the release of the FOMC statement today. Fed directors expressed confidence in stable market environments for the foreseeable future. Subtle indications abound that stocks may continue higher in the days and weeks to come.

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