The results are in. Deliberations have been deliberated, and the Fed Board of Governors can once again retreat behind the economic curtain where the markets will continue to masticate upon their own heavily digested thoughts. Markets showed modest gains on the day as investors patiently waited for a statement to be produced at 2:00 p.m. today. In that memorandum, Chairwoman Janet Yellen surprised listeners with the abdication of the arbitrary prose of meetings before. With the omittance of questioning how long to preserve low rates, the statement hinted at small feelings of urgency as it mentioned that more serious decision-making will occur at the December meeting. On top of rate hikes being delayed until December (possibly), the FOMC decided to leave out key phrases citing worries over the global slowdown and the high probability that the 2% inflation target will not be reached. In fact, the Fed's statement opined that "moderate" growth has been sustained for some time after the September meeting, making a rate hike of 25 basis points plausible in the next meeting. How did the market react? Looking at the two days before the Fed announcement, major indexes lagged with the energy sector bogging down the rest. Losses, though, were contained to under -0.50% with very positive earnings reports from tech companies like Apple and Google. Today, we saw a small dose of volatility with a small whipsaw accompanying the FOMC release around 2:00. In the morning, Dow Industrials and the S&P showed parsed gains with the expectation of rate delays. Upon release of the statement, equities took a hit and erased gains but nor before bouncing back to new highs. DJIA and S&P 500 finished at 1.13% and 1.18% on the day. Global markets' trading mostly ignored the Fed statement as a lot of the policy put forth in the message concerned the domestic markets such as inflation and the labor market. The Global Dow lost -0.40% with small intraday highs and lows. Who enjoyed today's message the most? There are three groups that can be mentioned explicitly:
1. Mid-cap and small-cap stocks enjoyed seeing rate hikes put off for at least one more month. Because of a slowdown in consumer spending and export numbers, companies who needed that the most were experiencing lower than usual cash flows. The fact that the FOMC Board is looking to support businesses on the operating fringe helped spur investor confidence in firms with weaker market capitalization. Showing this increase in bullish sentiment surrounding smaller companies are gains in the S&P Mid-Cap 400 and Small-Cap 600 indexes totaling to 2.03% and 2.75% respectively. The Russell 2000 grew 2.92% adding to a list of small- and mid-cap indices that performed better than their large-cap counterparts on the day.
2. The energy sector and WTI crude oil contracts both saw bullish surges today beginning with the expectation that low interest rates would be preserved and ending with the confirmation of another month of cheaper borrowing. Wednesday morning opened with a sharp incline in crude oil prices as supplies were shown to grow slower than expected despite three previous weeks of supply gains. Juxtaposed with a rate hike delay energy companies jumped as cheap debt will be important for companies crunched by low prices and negative cash flow. The S&P Energy index grew 2.22%, and the NYSE Arca Oil index grew 2.02%, both outperforming the Dow Jones and S&P major market indexes.
3. Lastly, the bond market received helpful information today to help alleviate some volatility that has recently plagued the market in charge of pricing debt. Unlike recent trading of the Treasury, long-term U.S. government debt saw an increase in yield as prices dropped after the FOMC statement caused many investors leave bonds for equities trading. Two-year bills saw the largest yield increase as the probability of gradual rate hikes in the next year increased dramatically. As equities continue to get more attractive as the economy warms up, expect bond yields to increase to levels modestly higher than those before rate hikes as earnings rise by the end of the year.
One thing that will worry commodity traders and companies associated with them is the strengthening of the dollar against Euro. After easing from Europe and Asia, consumers saw a systematic drop in the Euro's status in order to help struggling exports. As this happens, American producers see their exports to European customers get pricier. Right around the time statements were coming out of the Fed, the Euro dropped over 1% to a new low between the two currencies. On top of hurting U.S. exports, foreign money flowing into U.S. investments, both equities and commodities, could be hurt in the near future, endangering badly needed expanding GDP numbers.
So where do we go from here? Currently, the market is trading on an atmosphere that will enjoy easy monetary policy for another month as the Fed looks to bolster stable inflation growth by supporting payrolls. Moving into the holiday season, consumer spending is expected to rise along with energy prices expecting more demand from heating. These bullish figures along with consistent moderate growth should give Fed enough of a reason to raise rates, which should be a good signal to the markets. Instead, near the end of the year, there might be another slight correction as a gradual plan of tightening is introduced. Right around the December meeting, or perhaps in response to the comments by Yellen, economic reality should kick in with the resumption of healthy interest rates and a normal growth number. Tomorrow, investors should be looking at the newest GDP statistic that will become an immediate guide for the FOMC in December. Meanwhile, keep an eye on crude oil prices to see if deflationary pressures show any sign of lifting.