Closing Stock Market SummaryThe major indices enjoyed a rebound today, but that wasn't asking much of the market. Entering today, the S&P 500 was down 10.4% from its intraday high last Monday and the Nasdaq Composite was down 11.6%. To say that the market was oversold on a short-term basis was not an overstatement.
The magnitude, and speed, of those losses left it ripe for a rebound try, and it garnered support from a concurrent rebound in the Treasury market and an FOMC decision that went mostly as (recently) expected.
Briefly, the FOMC voted to raise the target range for the fed funds rate by 75 basis points to 1.50-1.75% and said it anticipates additional rate hikes will be appropriate. That vote was not unanimous, however. Kansas City Fed President George dissented, preferring a rate hike of only 50 basis points at this meeting.
The accompanying summary of economic projections revealed upward revisions to the median estimate for PCE inflation (to 5.2% from 4.3%) and core CPE inflation (to 4.3% from 4.1%) this year, a downward revision to the change in real GDP (to 1.7% from 2.8%), a higher unemployment rate (to 3.7% from 3.5%), and, most importantly, a sharp upward revision to the median estimate for the fed funds rate (to 3.4% from 1.9%).
The range of projections for the 2022 fed funds rate (3.1-3.9%) was more in-line with what the fed funds futures market has priced in; hence, there weren't any major surprises in the Fed's revised interest rate projections.
That understanding was a bit of a calming influence that enabled the market to stand its higher ground during Fed Chair Powell's press conference, which featured a declaration from the Fed Chair that he does not expect 75-basis point rate hikes to become common, and an allowance that the July meeting is likely to feature either a 50-basis point rate hike or a 75-basis point rate hike.
By the closing bell, however, the S&P 500 was little changed from the level it was trading at just before the 2:00 p.m. ET release of the policy directive. What that suggested to us is that today's gains were driven more by rebound-minded action following the large losses than they were by any genuine excitement over what the FOMC and Fed Chair Powell communicated today.
To be fair, the 2-yr note yield and 10-yr note yield moved lower following the Fed's communications. Treasuries were already rallying from their own short-term oversold condition, but the gains were extended after the close of the Treasury market's cash session when the Fed Chair was speaking. As of this writing, the 2-yr note yield was at 3.23%, down 20 basis points from where it settled on Tuesday, whereas the 10-yr note yield was at 3.32%, down 16 basis points from where it settled on Tuesday.
That move was likely aided by some short-covering activity, but in any case it didn't corroborate a bearish takeaway from what was learned today. A mixed batch of economic data, which featured weaker-than-expected retail sales for May, and the Fed's downward revision to the change in real GDP for 2022, could be considered bond friendly.
By and large, market participants were friendly to the majority of stocks today. Advancers led decliners by a nearly 3-to-1 margin at the NYSE and the Nasdaq; 21 of 30 Dow components ended with a gain; and ten out of 11 S&P 500 sectors closed higher. The lone sector holdout was the energy sector (-2.1%), which got clipped by lower oil prices ($115.25, -3.68, -3.1%) and an admonishment of top oil companies by President Biden, who said refinery margins well above normal "at a time of war" are not acceptable.
The mega-cap stocks were the key movers. The Vanguard Mega-Cap Growth ETF (MGK) gained 2.6% versus a 1.0% gain for the Invesco S&P 500 Equal Weight ETF (RSP).
In other important central bank news today, the ECB held an emergency meeting to develop a plan that it believes will mitigate the bond fragmentation issue in the eurozone. The ECB's action prompted a rebound bid in eurozone bond and equity markets, which had also gotten into a short-term oversold condition.
Reviewing today's economic data:
- The MBA Mortgage Applications Index increased 6.6% week-over-week, with purchase applications up 8% and refinancing applications up 4%
- Total retail sales decreased 0.3% month-over-month (consensus +0.2%) following a downwardly revised 0.7% increase (from 0.9%) in April. Excluding autos, retail sales increased 0.5% (consensus +0.7%) following a downwardly revised 0.4% increase (from 0.6%) in April.
- The key takeaway from the report is that spending activity weakened in May, with high gas prices likely curtailing discretionary spending on goods. Excluding gasoline station sales, retail sales were down 0.7% month-over-month in May. This could eventually pique concerns that the Fed will be raising rates aggressively into an economic slowdown.
- The New York Fed's Empire State Manufacturing Survey for June was weaker than expected at -1.3 (Briefing.com consensus 3.0), but it was improved from the -11.6 reading in April. Nonetheless, a number below 0.0 is still indicative of a contraction in manufacturing activity.
- The Import-Export Price Index for May showed a 0.3% decline in nonfuel imports and a 2.9% increase in non-agricultural exports. That left the year-over-year changes at 5.9% and 19.3%, respectively.
- Business Inventories increased 1.2% month-over-month in April, as expected, following an upwardly revised 2.4% increase (from 2.0%) in March.
- The June NAHB Housing Market Index dipped to 67 (consensus 68) from 69 in May.
Looking ahead, market participants will receive the May Housing Starts and Building Permits Report (8:30 a.m. ET), the Weekly Initial Claims Report (8:30 a.m. ET), and the June Philadelphia Fed Index (8:30 a.m. ET) on Thursday.
- Dow Jones Industrial Average: -15.4% YTD
- S&P 400: -18.7% YTD
- S&P 500: -20.5% YTD
- Russell 2000: -22.9% YTD
- Nasdaq Composite: -29.1% YTD