Stocks and Securities
The Federal Reserve increased short-term interest rates on Wednesday, as expected, raising the fed funds target range by 25 basis points to 2.00-2.25%.
Stocks were up modestly ahead of the release of the Fed’s decision, which crossed the wires at 2:00 PM ET, and extended gains after the central bank removed the word ‘accomodative’ from its policy statement. However, that initial move was reversed, and then some, following a post-decision press conference from Fed Chairman Jerome Powell, during which he said the language change didn’t signal a change in the Fed’s path for rate hikes.
The S&P 500 was up as much as 0.5% on Wednesday, but fell sharply in the final minutes of the session to finish with a loss of 0.3%. The tech-heavy Nasdaq Composite ended lower by 0.2%, the blue-chip Dow Jones Industrial Average finished lower by 0.4%, and the small-cap Russell 2000 lost 1.0%.
As for rate-hike projections, the Fed still appears to be on track to raise rates another 25 basis points in December, with the CME FedWatch Tool putting the chances at 79.2%. Beyond 2018, the Fed’s dot plot showed expectations for three rate hikes in 2019 (unchanged from June) and one in 2020 (also unchanged from June).
U.S. Treasury yields fell following the Fed’s policy announcement, although the 2-yr yield managed to close unchanged at 2.83%. The yield on the benchmark 10-yr Treasury note dropped four basis points to 3.06%. In currencies, the U.S. Dollar Index finished +0.2% at 93.90, but was volatile after the release.
The drop in Treasury yields weighed on the rate-sensitive financial sector, which finished at the bottom of the sector standings with a loss of 1.3%. The energy sector (-1.0%) was another notable laggard, dropping in tandem with the price of crude oil; WTI crude futures finished -1.0% at $71.58/bbl.
On the upside, the communication services, consumer discretionary, and health care sectors had relatively strong outings, adding between 0.2% and 0.4%.
On the corporate front, Nike (NKE 83.70, -1.09) lost 1.3% despite reporting above-consensus earnings; IBM (IBM 151.61, +2.70) climbed 1.8% after getting upgraded to ‘Buy’ from ‘Neutral’ at UBS; Papa John’s (PZZA 50.14, +3.93) spiked 8.5% after reports that its recently ousted founder and CEO is reaching out to private equity firms to buy the company; and SurveyMonkey (SVMK 17.24, +5.24) closed its first day of trading 43.7% above its IPO price of $12.00/share.
In politics, the details of a U.S.-Mexico trade deal will reportedly be released on Friday. That deal is expected to allow Canada to join at a later date.
Reviewing Wednesday’s economic data, which included August New Home Sales and the weekly MBA Mortgage Applications Index:
- New Home Sales in August hit an annualized rate of 629,000, which is below the consensus of 630,000. The July reading was revised to 608,000 (from 627,000).
- The key takeaway from the report is that it reflects the affordability constraints that are increasing on the back of high prices and rising mortgage rates. To wit, the median sales price was up 1.9% year-over-year to $320,200 and the supply of new homes for sale stood at a 6.1-months’ supply at the August sales pace versus 6.0 months a year ago.
- The weekly MBA Mortgage Applications Index rose 2.9% to follow last week’s increase of 1.6%.
Looking ahead, investors will receive a big batch of economic data on Thursday, including the advanced readings for August International Trade in Goods, Retail Inventories, and Wholesale Inventories, Durable Goods Orders for August, the third estimate for Q2 GDP, weekly Initial Claims, and August Pending Home Sales.
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Stocks on the Radar
Regarding potential ETF plays from our ETF ALPHA segment. We had a very good week last week with our watchlist performing as such: ERX (+4.75%), LABU (+3.75%), RUSL(+12.4%), TMF (-3.75%) and UGAZ (+18.2%). Higher risk trades as recommended were: EDC (+10.6%) and EWJ (+5.3% in two weeks). This week our watchlist of best ETFs to buy includes, BRZU, EDC, ERX, INDL, LABU and RUSL.
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Lastly, take time to read our “Best stocks to Buy in September”, as we highlighted four of our picks for this month.