Photo by ED JONES/AFP via Getty Images
AFP via Getty Images
Stocks inched higher Tuesday, building on Monday’s gains. The market feels confident—for the moment—that the Federal Reserve won’t turn any more hawkish than it has signaled.
The Dow Jones Industrial Average closed up 68 points, or 0.2%, while the S&P 500 advanced 0.5% and the Nasdaq Composite rose 0.2%. On Monday, stocks rallied into the close, sending the S&P 500 and Nasdaq up 0.6% and 1.6%, respectively.
The S&P 500 and Nasdaq are up from new bottoms for the year on Friday, in what looked like an oversold market to many.
“The Fed is not going to get any more hawkish that what they’ve communicated, so I think there’s some optimism heading into tomorrow’s meeting,” said Jeff Schulze, investment strategist at ClearBridge Investments. “Investors are looking at this as a buy-the-dip opportunity.”
Markets expect the Fed to hike the benchmark lending rate by at least 50 basis points instead of the standard 25 basis-point hike, though a more “hawkish” 75 basis-point hike seems to be within the realm of possibility. It’s still unclear, however, just how aggressive the Fed will be in lifting rates going forward.
“Because the market has priced in a 50 basis point rate hike at the Federal Reserve’s May meeting, the focus will immediately shift to just how many half-point hikes the Fed expects to initiate over the balance of 2022,” wrote Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence and former adviser to the president of the Dallas Fed.
That means for this week, the rally could conceivably continue. “The market has priced in an aggressive path forward for interest rate increases from the Fed,” wrote Lindsey Bell, Ally’s chief markets and money strategist. “No one will be surprised if the Fed raises rates 50 basis points on Wednesday.”
But even if the rally continues for the next few days, the market has a long way to go before it will look like it’s on a sustained path upward. The problems start with macroeconomic issues, one of which relates to interest rates.
Uncertainty around the economic impact of higher rates is one thing. “With tightening of financial conditions, it isn’t clear how much that is going to slow economic growth, said Schulze.
Then, there’s the impetus for higher rates: inflation.
The eurozone’s producer price index rose 36.8% year over year for March, slightly beating estimates but also rising over the prior result of a 31.5% increase.
It’s that kind of inflation that refuses to go away that could compel central banks to lift interest rates faster than expected. Markets are waiting for inflation to hit a peak and then decline, which would ease the pressure on central banks to lift rates so quickly. Already, the Reserve Bank of Australia hiked interest rates by 25 basis points, higher than the expected 15 basis point increase.
Consistent with this uncertainty, the stock market has seen selloffs followed by short rallies for the past several months. Those rallies have been shorter-lived each time. The S&P 500 fell to a new low for the year Friday and is still down about 13% from its early January all-time high. The index, at just under 4,200, is also below its 50-day moving average of 4,374. That means market participants are still not comfortable buying stocks at prices consistent with their recent trends.
In light of that, it isn’t necessarily surprising to see the stock market largely struggling to dig itself out of its hole. Given the pace of the recent decline, the S&P 500 could fall to around 3,700, wrote Tom Essaye, founder of Sevens Report Research. From rising rates to lockdowns in China causing supply constraints that threaten sales for companies like Apple, the economic outlook needs to get better in order for the stock market to sustainably turn itself around.
“Market volatility is expected to remain elevated over the next few Fed meetings and that could mean stocks could soften …before traders aggressively buy the dip,” wrote Edward Moya, senior market analyst at Oanda.
Six stocks on the move:
Biogen (ticker: BIIB) stock dipped 0.8% after the company reported a profit of $3.62 a share, missing estimates of $4.34 a share, on sales of $2.5 billion, in line with expectations. While the quarter looked ugly, the company did reaffirm full year sales guidance of just under $10 billion and EPS guidance of about $15.13. The company is also implementing a cost savings program, which includes significantly scaling back its infrastructure for Aduhlem, an Alzheimer’s medication. The stock is already down about 13% for the year. Now, the stock “looks attractive to us,” wrote RBC analyst Brian Abrahams.
Hilton Worldwide Holdings (HLT) stock fell 4.1% after the company reported a profit of 71 cents a share, beating estimates of 66 cents a share, on sales of $1.72 billion, below expectations for $1.75 billion.
DuPont (DD) rose 0.7% after issuing a second-quarter adjusted earnings forecast below Wall Street expectations and a revenue forecast for the year that also missed.
Expedia (EXPE) dropped 14% even after revenue in the first quarter rose 80%, and Chief Executive Officer Peter Kern told analysts the online travel company was “feeling very good about a summer recovery.”
MGM Resorts (MGM) fell 2.6% after first-quarter adjusted earnings topped analysts’ forecasts and revenue rose to $2.85 billion, up from $1.65 billion a year earlier.
Clorox (CLX) rose 3% even after the maker of disinfectant wipes and other cleaning products cut its full-year earnings forecast, citing cost inflation.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Joe Woelfel at joseph.woelfel@barrons.com
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