Over the past week, we have witnessed a leveling off in our rebound from the February 11th lows. Much of the leveling off in price appreciation for equities has also been accompanied by a slowdown in the rate of turnover or volume. Both have been the result of investors taking a cautious pause ahead of the FOMC Meeting Announcement and subsequent press conference given by Fed Chair Yellen yesterday. My recent reference for the ever-present need for balance by the Fed was achieved by the FOMC and Chair Yellen and in so doing, equity markets managed to dig themselves out of a deep intraday hole.
Virtually no analyst was expecting the Fed to move on rates yesterday and few, if any, expected the FOMC to downshift projections for rate increases so unequivocally from 4 to 2 this year. That shift in outcome, though as a result of global headwinds and uncertainty over inflation velocity, was obviously welcomed by investors.
As a result, investors and the Fed had a chance to have their cake and eat, too.
The Dow Industrials (+0.44%), S&P 500 (+0.57%) and Nasdaq (+0.75%) all moved higher and out of neutral as volume on the NYSE (14.2%) and Nasdaq (+1.0%) rose.
By way of yesterday’s FOMC Meeting Announcement, the Fed effectively projects a vigilant stance over a feeble expansion while at the same time allows for diminished expectations for further tightening in the near term. Investors were more than willing to throw another temper tantrum yesterday, but the FOMC Announcement and Chair Yellen didn’t allow for it. It was rather balanced; leaving current rates unchanged while leaving room for rates and for the prospect of another move higher in rates this year.
Crude oil provided another critically important leg of support to yesterday’s reversal in equity markets by gaining $2.13/bbl or 5.86%. The principle driver of enthusiasm in the crude pits yesterday was the long awaited news of an announcement of a meeting of oil producers focused on an output freeze. Further data released yesterday by the EIA suggested that we appear to be reaching a welcome degree of equilibrium in the supply/demand. US crude inventories rose a modest 1.3 million barrels over the previous week – significantly short of the 3.4 million expected. Also very importantly, both gasoline and distillate inventories shrank in the period by 0.7M and 1.1 M barrels respectively.
How I See it:
Given the sharp rally and follow-through posted in crude prices yesterday coupled with the balanced FOMC Announcement and the solidly positive internals as framed by the advance decline line, I expect we see the bias in pricing to be higher over the near term.
Earnings season is two weeks away and could well spoil the party.