●Fed raises rates Wednesday, cites strong economy, telegraphs future hikes
●Yesterday’s rally reverses market’s initial reaction
Here’s about all traders need to know about Wednesday’s Federal Reserve’s announcement:
●The Fed did exactly what was expected: raised rates 0.25% and telegraphed another hike in December and more next year.
●The market sold off after the announcement, with the S&P 500 (SPX) closing down on the day.
●The SPX rebounded yesterday, closing up on the day and above its open.
The Fed hasn’t surprised anyone for a while now—which is to its credit. Telegraphing its intentions is part of the Fed’s playbook: Let everyone know what you plan to do, then do it, and you foster confidence in the marketplace and hopefully limit the surprises that can cause nasty market shocks. That’s especially important when what you’re doing, like raising interest rates, isn’t necessarily popular with a lot of investors and traders.
That lack of popularity seemed to translate into Wednesday afternoon’s market action, when, after a brief post-announcement pop, the S&P 500 (SPX) dropped around 0.9% to close down on the day (five-minute chart, above). At 4 p.m. ET it basically looked like the market was saying, take this rate hike and shove it.
With the SPX already a couple of days into a pullback off its most recent high (and let’s face it, with October around the corner), Wednesday afternoon’s downturn may have given some nervous traders reason to think more selling was possibly in the works.
Yesterday, though, the SPX opened higher and put up its biggest intraday gain in weeks (up around 0.7% midday):
Even though traders worry about the impact of rising rates on the stock market, the Fed did specifically state that its expectations for continued US economic strength factored into its decision.1 There are always so many factors driving the market that it’s virtually impossible to identify the one piece of information that may have the most influence on prices—or decipher what the market thinks about it—in real time. But Fed monetary policy is one of the things the market definitely pays attention to—hence the near standstill the market typically comes to in the hours before a Fed announcement, and the volatility that usually follows even the most run-of-the-mill statement.
Over the past couple of years, it may not be the market’s reaction on the day of a Fed announcement that offers a clue to short-term price direction, but the day after. Bullish momentum the day after a Fed announcement—a higher close, or a close above the opening price and/or near the top of the day’s range (or, preferably, all of the above)—has sometimes been followed by short-term bullish price action (i.e., at least a day or two). For instance, check out the up day on August 2 that followed the August 1 Fed announcement. Conversely, bearish momentum the day after an announcement has sometimes been followed by short-term downside price action.
No pattern works all the time, and changing market conditions can render even the best one irrelevant on a moment’s notice, but a trader’s job is to figure out when market history is fitting into the market present.
Today’s numbers (all times ET): Personal Income and Outlays (8:30 a.m.), Chicago PMI (9:45 a.m.), Consumer Sentiment (10 a.m.).
1 CBSNews.com. Federal Reserve hikes interest rate, citing "strong" economy. 9/26/18.