>>> US Close Dow +0.13% S&P +0.03% NAsdaq -0.11%

Closing Stock Market Summary

The stock market closed mixed on Wednesday, as investors digested the second rate cut from the Fed this year and an earnings warning from FedEx (FDX 150.91, -22.39, -12.9%). The S&P 500 (+0.03%), Dow Jones Industrial Average (+0.1%), and Nasdaq Composite (-0.1%) finished little changed. The Russell 2000 declined 0.6%. 

The FOMC voted 7-3 to cut the target range for the fed funds rate by 25 basis points to 1.75-2.00%, as expected. Price action leading up to the decision was muted and volatility quickly ensued after the policy directive. Buying conviction, however, was largely absent before and immediately after the decision as the market extended losses heading into Fed Chair Powell's press conference.

Key takeaways from the Fed's policy decision included:

(1) Voting members remained divided: St. Louis Fed President Bullard preferred a 50-basis points cut, while Boston Fed President Rosengren and Kansas City Fed President George preferred no change in the fed funds rate; (2) the median Fed member is suggesting there will be no more rate cuts in 2019 and 2020; and (3) the interest paid on excess reserve balances was lowered to 1.80% from 2.10% -- which could provide some stability in the repo market after the New York Fed injected more liquidity today.  

Selling pressure soon abated and stocks climbed to session highs, with the S&P 500 financials sector (+0.4%) providing influential leadership, as the Fed Chair Powell wrapped up his press conference. The utilities sector (+0.5%) outperformed, while the energy sector (-0.4%) underperformed as oil prices ($58.07/bbl, -1.30, -2.2%) continued to pull back. 

Mr. Powell said the Fed does not see a recession, is not interested in negative rates, and the repo issue has no implications for the economy or monetary policy. FedEx (FDX), meanwhile, provided a pessimistic view on the global economy. The company cut its FY20 EPS guidance due to a weakening global environment, driven by trade tensions and policy uncertainty. 

On a related note, Adobe Systems (ADBE 279.72, -4.97, -1.8%) guided Q4 EPS and revenue below consensus, although it did beat earnings estimates. 

The U.S. Treasury yield curve saw some flattening activity following the Fed decision. The 2-yr yield increased two basis points to 1.75%, and the 10-yr yield declined three basis points to 1.79%. The U.S. Dollar Index also strengthened after the decision, increasing 0.3% to 98.55. 

Reviewing Wednesday's economic data, which included Housing Starts and Building Permits for August and the weekly MBA Mortgage Applications Index:

  • Total housing starts surged 12.3% m/m in August to a seasonally adjusted annual rate of 1.364 million units (consensus 1.255 million) while total permits jumped 7.7% to 1.419 million (consensus 1.300 million).
    • The key takeaway from the report is that the growth wasn't entirely a multi-unit story. Single-family starts and permits both increased nicely month-over-month. The permits increase is especially notable, because that is a leading indicator that should support the market's improved attitude toward the U.S. growth outlook.
  • The weekly MBA Mortgage Applications Index declined 0.1% following a 2.0% increase in the prior week.

Looking ahead, investors will receive the following data on Friday: Existing Home Sales for August, weekly Initial and Continuing Claims, the Current Account Balance for Q2, the Philadelphia Fed Index for September, and the Conference Board's Leading Economic Index for August. 

  • Nasdaq Composite +23.2% YTD
  • S&P 500 +19.9% YTD
  • Dow Jones Industrial Average +16.4% YTD
  • Russell 2000 +16.3% YTD

WSJ : Index Funds Are the New Kings of Wall Street

Index Funds Are the New Kings of Wall Street
Funds tracking broad U.S. equity indexes had more assets by value than stock-picking rivals for the first time

Money managers that mimic the stock market just became the new titans of the fund-management world.

Funds that track broad U.S. equity indexes hit $4.27 trillion in assets as of Aug. 31, according to research firm Morningstar Inc., giving them more money than stock-picking rivals for the first-ever monthly reporting period. Funds that try to beat the market had $4.25 trillion as of that date.

The passing of the asset crown is the latest chapter in one of the most dramatic transformations in the history of financial markets. In the past decade, $1.32 trillion fled actively managed U.S. equity mutual funds and exchange-traded funds as nearly $1.36 trillion was added to low-cost funds that mimic market indexes.

That shift lowered the price of investing for individuals, reduced the influence of stock pickers and turned a handful of Wall Street outsiders into the biggest power brokers in the industry.

Indexing giants such as BlackRock Inc., Vanguard Group and State Street Corp. now wield considerable power over corporate America and can cast pivotal votes that determine everything from who sits on a company board to how executives deal with issues ranging from climate change to pay equity.

The rise of indexing has attracted scrutiny from those who are worried market-mimicking funds could distort prices and exacerbate market turbulence. Index giants have so far dismissed those concerns as fear mongering as they continue to grow.

“Let’s first define when people talk about indexing getting big,” Vanguard Chief Executive Tim Buckley said in May. “It’s not big enough. There’s still too many people getting ripped off by high-cost active.”

The Morningstar data covers a slice of the mutual fund and ETF world focused on U.S. equities. Industry trade group Investment Company Institute said its own data showed assets in U.S. equity index mutual funds and ETFs haven’t surpassed actively managed U.S. stock funds.
Index funds are a long way from dominating the whole stock market. U.S.-focused index equity funds make up nearly 14% of the American stock market, up from roughly 7% in 2010, according to the Investment Company Institute. Index funds generally contribute up to 5% of U.S. stock-market trading, economists estimate.

Old-fashioned money managers aren’t willing to relinquish their crown so easily. They are experimenting with new fee structures, leaning more heavily on data science and turning to illiquid bets in a bid to keep customers and attract new ones. Some also are using index funds to build their portfolios.

“I look at it much in the same way as Roger Federer looks at Novak Djokovic,” said Andreas Utermann, chief executive of Allianz Global Investors, in a nod to two tennis titans. “It helps us to improve our game.”

The challenge to traditional stock pickers began more than four decades ago with Vanguard founder Jack Bogle’s introduction of the first index mutual fund for ordinary investors in 1976. His idea, which was to allow everyday investors to essentially own a stake in the entire market at minimal cost, was initially scorned by Wall Street.

Another threat emerged in the 1990s with the advent of exchange-traded funds. These are collections of stocks or bonds that trade on exchanges and give investors rapid exposure to markets.

Following the 2008 financial crisis, more customers pulled their money from actively managed funds when they realized pricier managers had failed to protect them from the market rout. The outflows snowballed as stock pickers struggled to beat one of the longest bull runs in history. More than 80% of U.S. actively managed equity funds underperformed the S&P Composite 1500 in the decade ended 2018, according to S&P Global.

Three firms—BlackRock, Vanguard and State Street—were major beneficiaries of the shift, cementing a roughly 80% share of the index fund market. BlackRock and Vanguard collectively took in a daily average of roughly a billion dollars in total net flows last year. State Street’s SPDR S&P 500 ETF Trust was one of the most-traded securities in the past year.

These firms face new questions as their power intensifies. One is how they should wield their newfound influence over companies. BlackRock, Vanguard and State Street hold about 20% of the S&P 500 through funds they manage, according to FactSet. Big indexers were key votes in a landmark shareholder victory in 2017 that pushed oil giant Exxon Mobil Corp. to explain the impact of climate-change rules.

“The rise of passive investing raises the corporate governance challenge of the 21st century,” said Securities and Exchange Commission Commissioner Robert Jackson in a statement. “It can give a few individuals influence over the outcome of elections in the corporations that control the economic future of millions of American families.”

Others question if index funds are equipped to watch over all the companies in which they invest. “They have driven real governance improvements,” said Lyndon Park, who heads a business at ICR that advises companies on shareholders. “But given the large universe they invest in, their stewardship teams can’t follow every company and sector-specific issue.” Indexing managers from BlackRock to Vanguard have been expanding their stewardship teams in recent years.

Lynn Blake, who heads equity indexing at State Street Global Advisors, adds that the firm has to be selective about which companies it meets and that it uses technology to augment the reach of its 12-person stewardship team. “We will hold positions for a very long time,” she said. “We want to work closely with directors and boards so they understand our point of view.”

Another concern is the ripple effect index funds have on the stock market. Some studies show that company share prices get a boost when they are added to major benchmarks, and stocks can be vulnerable to short-term price swings as money moves in and out of index ETFs, especially for shares that are bigger parts of indexes and less traded.

Asset managers that run index funds say fears that the strategy could cause widespread market disruptions are overblown. There are hundreds of index products and they don’t all trade in tandem. Moreover, buying and selling by index funds reflects real shifts in sentiment by investors, and stock prices should respond regardless of what kind of fund is used.

But the apostle of the index fund became more concerned about the unintended consequences of indexing’s success in his final years. If index giants kept growing at the same clip, it would be a matter of time before governments tried to break them up, the late Mr. Bogle told close associates. He worried this would put the future of the index fund in jeopardy.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:

  • FDX -10.7%, CHWY -4%, ADBE -2.7%, GIS -1.9%, STLD -1.3%

Other news:

  • TBIO -10.4% (prices offering of 9 mln shares of its common stock at a public offering price of $10.00 per share)
  • PTCT -7.9% (commences public offering of $100 mln of shares of common stock and $250 mln convertible senior notes due 2026 )
  • IOTS -7.8% (proposes private offering of convertible senior notes due 2024)
  • ZYNE -5.2% (announces "positive" top line results from the open label Phase 2 BELIEVE 1 clinical trial)
  • CTST -3.9% (extending move lower after announcing Health Canada suspended its license)
  • ACAD -3.5% (prices underwritten public offering of 6.25 mln shares of its common stock at a price to the public of $40.00 per share)
  • CBAY -3.4% (announces departure of Chief Medical Officer Pol Boudes, M.D.)
  • UPS -3.1% (following FDX earnings/guidance)
  • WLL -1.8% (extending yesterday's 16% move lower)
  • ALXN -1.3% (announces CFO transition; Paul Clancy to be succeeded by Aradhana Sarin, M.D. after filing of Q3 results)

Analyst comments:

  • N/A.

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • N/A.

Other news:

  • CDW +6.4% (to join S&P 500), TLRD +2.9% (President/CEO and Director each disclosed the purchase of 15K)
  • ROAD +2.8% (prices secondary offering of 5 mln shares of its Class A common stock by certain shareholders at $14.25 per share )
  • BE +2.7% (after closing more than 20% lower on cautious newsletter report)
  • PLUG +1.8% (announces 'five-year plan that will position the company to deliver on an annual basis by 2024 $1 billion of revenue')
  • LTRPA +1.2% (ticking higher; President/CEO disclosed the purchase of ~15K shares of Series B Common Stock worth ~$160K)
  • KDMN +0.8% (announced that the FDA has approved its generic Trientine Hydrochloride Capsules USP, 250 mg)

Analyst comments:

  • TELL +1.4% (initiated with Outperform at Evercore ISI; tgt $14)
  • AEO +1.1% (initiated with a Buy at DA Davidson)
  • CACI +0.8% (added to Conviction Buy list at Goldman)

>>> US Early premarket gappers

Early premarket gappers

Gapping up:

  • ZYNE +9.7%, CDW +6.3%, ROAD +3.5%, TLRD +2.4%, LTRPA +1.2%, AEO +1.1%, CACI +0.8%, KDMN +0.8%, TELL +0.8%

Gapping down:

  • FDX -11.9%, TBIO -10.4%, IOTS -7.8%, PTCT -7.7%, CHWY -3.9%, ACAD -3.7%, CBAY -3.6%, CTST -3.1%, WLL -3%, UPS -2.7%, ADBE -2.1%, STLD -2%, ALXN -1.3%, INVH -0.9%