Sunday, December 1, 2013

Stocks Dip as Fed Minutes Offer More Questions Than Answers

At the height of the financial crisis, the Federal Reserve was perceived as a bastion of stability for fearful investors. These days, it’s offering little but uncertainty–and causing stocks to fall in the process.

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The S&P 500 dropped 0.4% to 1,781.37 following the release of the minutes of the last FOMC meeting, while the Dow Jones Industrial Average fell 0.4% to 15,900.82. The S&P 500 had been up as much as 0.4% today, but has now dropped for three days in a row for the first time since a five day slump ended on Sept. 25.

J.M. Smucker (SJM) dropped 6.5% to $101.49 today, making it the biggest loser in the S&P 500, with Lowe’s (LOW) close behind, down 6.2% at $47.33. Other big losers include Newmont Mining (NEM), which fell 3.5% to $26.39, eBay (EBAY), which has dropped 3.3% to $50.39, and Iron Mountain (IRM), which declined 3.3% to $28.71.

Today’s drop comes courtesy of the FOMC minutes, which did little to clear up the uncertainty around Fed policy. Newedge’s Annalisa Piazza explains:

Headlines from the Minutes of the late Oct FOMC meeting suggest that policymakers remain on a wait and see mode, waiting for further evidence before making final decisions on future policy steps. The economic outlook has not changed much since September and inflation is expected to move back to 2% in the medium term. The effects of the fiscal debate and government shutdown have been discussed but policymakers see the impact as limited and temporary. That said, policymakers still see significant downside risks for the economy.

In a nutshell, FOMC members seem to be united in their decision to keep policy on hold at the end of Oct. Since then, the economy has provided mixed signals, with confidence sliding vs some improvement in the labour mkt and some hard data. The mixed economic scenario remains a source of uncertainty and – in our view – the Fed will remain on hold at least until Q1-14, especially with the upcoming Fed Chair Yellen who remains – also considering her recent comments – one of the more dovish members of the FOMC.

JPMorgan’s David Hensley and team avoid reaching any conclusions:

In a speech last night, Chairman Bernanke suggested the door is open to tapering while emphasizing that the Fed can be patient about hiking rates even after the unemployment threshold is crossed, so long as inflation remains tame (the Bank of England sent a similar message about patience and thresholds today). Bernanke said the market has done a better job of separating the Fed's decisions about asset purchases and policy interest rates since officials postponed tapering in September. That decision was prompted by the lack of any discernible pickup in growth at the time of the meeting, which was contrary to the Fed's expectations, combined with the risks posed by the "ongoing fiscal debates." Today's October FOMC minutes covered much of the same ground. Policymakers discussed ways to clarify or possibly strengthen their forward guidance, although there was no consensus. Notably, there was limited support for lowering the unemployment-rate threshold from 6.5%.

The bottom line: Your guess is as good as mine.

Yesterday, I wrote about Instinet’s Joe Mezrich and his view that monetary-policy uncertainty can limit further upside in the stock market. And although I hate to repeat myself, I’ll do it here, because I think the message is important: Monetary policy uncertainty can hurt stocks.

Instinet's Joe Mezrich, however, is worried about the breakdown between monetary policy uncertainty and the stock market. He notes that while uncertainty is rising (and yes, he does have a way to measure this), the VIX is falling, not your normal state of affairs. Implied earnings growth, meanwhile, has also decoupled from monetary policy. To Mezrich, these are just two of the warning signs signaling a potential pullback.

For now, the market has been able to tread water. Can it continue?

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