S&P 500 Continues Losing Streak, NASDAQ Bucks Trend with Small Gain after Fed Minutes

The major U.S. stock indexes finished mixed on Wednesday with the NASDAQ Composite bucking the trend with a higher close. The Dow Jones Industrial Average finished lower while the S&P 500 Index took a loss for a fourth straight session.

On Wednesday, the blue chip Dow Jones Industrial Average settled at 33045.09, down 84.50 or -0.26%. The benchmark S&P 500 Index finished at 3991.05, down 6.29 or -0.16% and the tech-weighted NASDAQ Composite closed at 11507.07, up 14.77 or +0.13%.

Fed Minutes Offer Guidance on Rate Policy

Although the price action didn’t reflect it, investors have to be relieved with the release of the minutes since it gave them a little clarity, but did nothing to change the fact that interest rates are poised to move higher. While some analysts described the minutes as showing few surprises, some went as far as calling them stale.

Our work tends to lean to the “stale” side. There is a three week lag in the minutes and since the Feb. 1 policy decision, the financial conditions in the U.S. have changed quite a bit. The jobs market is still hot, inflation is still tilted to the upside, consumers are spending and the services industry is cooking.

Minutes Said Nothing to Alter Market Expectations of 5.35% Fed Terminal Rate

The key takeaways in my opinion are that the Fed is on a mission to keep raising rates until inflation is tamed, even as the risk of recession grows. And that “almost all” Fed official agreed to slow the pace of increases in interest rates to a quarter of a percentage point, and only “a few” participants outright favored a larger half-percentage point increase at the meeting, or said they “could have supported” it.

So let’s just conclude that stock market investors now know that the recent strength in economic data means there has not been enough progress toward taming inflation, which means the Fed will issue new projections at its March 21-22 meeting. It’s now up to investors to make the right adjustments and hedge the risk to reflect that higher rates are coming.

Money market participants now expect rates to peak at 5.35% by July and stay around those levels until the end of 2023. This is up from 4.88% at the end of January.

Momentum Still to the Downside as Investors Adjust to Higher Rates Scenario

There was nothing particularly bearish or bullish in the Fed minutes. So using the expected peak at 5.35% as their guide, investors are going to continue to adjust their portfolios to reflect this new higher terminal rate.

Wednesday’s Stock Market Internals

Most of the 11 major S&P 500 sectors fell, with energy and real estate the poorest performers. The pair declined 0.8% and 1%, respectively. Energy stocks fell because of sharply lower crude oil prices. Real estate stocks lost ground because of the jump in mortgage rates and its impact on property values.