Stocks Drop as Market Dials Back Rate Expectations

The major indexes extended initial losses after the Fed kept benchmark interest rates unchanged and pushed back on expectations for imminent rate cuts.some position-squaring after the long Treasury rally last year that took yields sharply lower.

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(Wednesday market close) U.S. equity indexes finished lower Wednesday, extending earlier declines after the Federal Reserve left benchmark short-term interest rates unchanged and signaled it needs to see further signs inflation is under control before making any rate cuts.

The Federal Open Market Committee (FOMC), after concluding its two-day meeting early Wednesday afternoon, left its funds rate target range unchanged at 5.25% to 5.5%, as expected. But the FOMC, in a post-meeting statement, said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably” toward its 2% long-term goal.

Stocks extended initial declines late in the session as the FOMC statement, combined with comments from Fed Chair Jerome Powell, prompted investors to rein in expectations for Fed rate cuts. The market was already under pressure after Google parent Alphabet (GOOGL) and Microsoft (MSFT) reported quarterly results late Tuesday that disappointed the market.

The FOMC’s statement was “the Fed’s way of pushing back the timing of rate cuts,” Schwab Center for Financial Research analysts said in a report, noting that Fed leaders also conveyed a more optimistic view of the economy than they did at the end of 2023, suggesting an initial cut may not happen until spring at the earliest.

“We have been in the camp that a cut in May seems more likely given the better-than-expected economic growth and the strength in the labor market, and we maintain that view,” the Schwab Center for Financial Research said.

Here’s where the major benchmarks ended:

  • The S&P 500® index (SPX) fell 79.32 points (1.6%) to 4,845.65; the Dow Jones Industrial Average® (DJI) lost 317.01 points (0.8%) to 38,150.30; the Nasdaq Composite® (COMP) dropped 345.89 points (2.2%) to 15,164.01, a two-week low.
  • The 10-year Treasury note yield (TNX) decreased nearly 9 basis points to 3.969%.
  • The Cboe Volatility Index® (VIX) jumped 1.03 to 14.34.

Regional banks led Wednesday’s declines after New York Community Bancorp (NYCB), which took over the failed Signature Bank last year, reported a fourth-quarter loss of $193 million, sending its shares down nearly 38%. The KBW Regional Banking Index (KRX) sank 6%. Communications services shares were also among the weakest performers. Energy companies were also under pressure as WTI Crude Oil futures (/CL) shed nearly 3%.

Stocks on the move

The following companies had stock price moves driven by analyst ratings, quarterly results, or other news:

  • Advanced Micro Devices (AMD) declined 2.5% after the semiconductor company reported fourth-quarter results late Tuesday that met expectations but also released a first-quarter revenue outlook that fell short of analysts’ forecasts.
  • Alphabet shares dropped more than 7% after the company reported lower-than-expected advertising revenue of $65.5 billion. The stock is down nearly 9% from a record close Monday.
  • Boeing (BA) rose 5.3% after the aerospace company and Dow member reported a smaller-than-expected quarterly loss and higher-than-expected revenue.
  • Microsoft fell 2.7% after the company’s revenue forecast for the current quarter fell shy of analysts’ expectations, overshadowing better-than-expected earnings for the previous quarter. The shares remain near a record close just under $410 since Monday.
  • Paramount Global (PARA) surged 6.7% following reports billionaire entrepreneur Byron Allen submitted a takeover offer to buy the outstanding shares of the company, which owns CBS and other media properties.
  • Rockwell Automation (ROK) plunged 18% after the industrial technology’s quarterly results fell short of expectations.
  • SoFi Technologies (SOFI) lost nearly 7% after Morgan Stanley (MS) downgraded the digital lender to “underweight” from “equal weight,” citing expectations for slower revenue growth in 2024.
  • Stryker (SYK) gained 6% after the medical technology company’s quarterly earnings and revenue surpassed expectations.

Tuesday’s quarterly results from Alphabet and Microsoft will be followed Thursday by earnings reports from three other Magnificent Seven mega-cap companies: Amazon (AMZN), Apple (AAPL), and Facebook parent Meta Platforms (META). Of the other two companies, Tesla (TSLA) reported results last week and Nvidia (NVDA) is expected to report February 21.

Other companies expected to report quarterly numbers Thursday include pharmaceutical giant and Dow member Merck (MRK), along with grain processor Archer Daniels Midland (ADM), industrial conglomerate Honeywell International (HON), and Royal Caribbean Cruises (RCL).

Inflation still above Fed’s target

Wednesday’s FOMC statement varied considerably from previous Fed policymakers’ meetings in recent months, removing, for example, wording on “tighter financial conditions,” Schwab Center for Financial Research analysts noted.

Powell, in a press conference following the end of the FOMC meeting, also sounded encouraged by a mostly uninterrupted decline in inflation over the past year. But he also seemed to throw a wet blanket on the idea the Fed is near a “pivot” toward rate cuts.

Easing inflation readings are “welcome, but we need to see continued evidence to build confidence that inflation is moving sustainably toward our goal,” Powell told reporters.

Powell further said it’s unclear whether the economy will achieve a “soft landing,” where inflation returns to the Fed’s 2% target and recession is avoided.

“Core inflation is still well above our target,” Powell said. “We’re encouraged by our progress, but we’re not declaring victory at this point. We think we have a ways to go.”

The FOMC, Powell added, “intends to move carefully to dial back the restrictive stance we have in place. We’re going to be data-dependent and go meeting by meeting.” A Fed cut in March is probably not going to happen, Powell indicated.

Late Wednesday, traders reduced expectations for a funds rate cut following the March FOMC meeting to about 37%, down from 41% Tuesday, according to the CME FedWatch Tool. The indicator also shows a roughly 92% chance the funds rate will be at least a quarter-point lower after the FOMC’s May meeting.

Recent inflation indicators have slowed sharply from the four-decade highs reached in spring 2022, but they are still elevated in the Fed’s view. In December, Personal Consumption Expenditures (PCE) prices, the Fed’s favored inflation gauge, rose 0.2% both overall and in the core rate, which excludes food and energy. Additionally, the year-over-year core PCE rate rose 2.9%, down from 3.2% in November and the lowest monthly figure since March 2021.

The FOMC meeting precedes Friday’s Nonfarm Payrolls report, which is expected to show job growth slowed early this year but remained relatively strong. January payrolls are expected to increase by 180,000, according to Trading Economics. In December, payrolls grew by 216,000. The unemployment rate is expected to rise to 3.8% from 3.7% in December.

Earlier Wednesday, the ADP® National Employment Report posted an increase of 107,000 jobs in January, lower than the Briefing.com consensus of 140,000. However, recent ADP reports haven’t correlated well with the official government jobs report. A hiring slowdown in late 2023 spilled into January, and pressure on wages continued to ease, according to the ADP.

“Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay,” ADP Chief Economist Nela Richardson said in a statement. “Wages adjusted for inflation have improved over the past six months, and the economy looks like it’s headed toward a soft landing in the United States and globally.”

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

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