Feeding The Beast: Stocks Look To Rebound A Day After Fed Disappoints

(Thursday Market Open) There’s an old saying that the market is a greedy beast and always wants more.

Proof of that might be yesterday’s session, when stocks cratered despite the Fed lowering interest rates. The problem? Many investors wanted the Fed to signal the start of a prolonged rate-cutting cycle, not just a simple rate cut, but that didn’t happen.

At least that was the takeaway from Fed Chairman Jerome Powell’s press conference, though he did try to walk back initial comments that many interpreted as him saying this was a one-and-done easing.

The remark Powell made early in the press conference about how he saw this rate cut as a “mid-cycle adjustment” really seemed to do the most damage. Before he said that, the S&P 500 Index (SPX) was down a handful of points. It quickly lost 30 points as investors weighed his words, falling back to well under 3000 by the end of the day.

The Federal Open Market Committee (FOMC) doesn’t see the economy being in a position where the Fed funds rate needs to be cut a lot, Powell added, and he even referenced the possibility that rates could go back up at some point. All of this left people a bit confused, and definitely less certain about two more rate cuts this year.

Powell did clarify later in the press conference that he didn’t specifically say it’s “one and done,” and that initially seemed to help ease worries on Wall Street before stocks took a final belly flop to end the day Wednesday. Stock futures pointed toward a higher open Thursday as investors continued to weigh his words.

One takeaway you could make from Powell’s lack of a promise to cut rates again is positive: The economy is doing so well that rate cuts might not be needed. That kind of got lost in the shuffle yesterday, but maybe it’s starting to be more clear to people this morning.

All the excitement around the Fed could make tomorrow’s jobs report a lot more fun to watch. Analysts expect to see 160,000 jobs created in July, according to consensus from Briefing.com. That would be down from 224,000 in June but still near the three-month average of 170,000 and a decent number.

The thing to think about going into jobs is that if the headline number is really hot, does that add to peoples’ thoughts that maybe the Fed could get more hawkish?

The wage picture is another thing to consider keeping an eye on. Analysts expect solid wage growth of 0.3% for the month. Average hourly earnings were up 3.1% year-over-year in June.

The Fed meeting kind of buried some good news on earnings this week from Apple (NASDAQ:AAPL) and General Electric (NYSE:GE). About 60% of S&P 500 companies have reported so far, and we’re still seeing around 77% of them beat analysts’ expectations. It is worth a reminder, though, that expectations were set at a low bar. Overall, earnings growth is roughly flat so far, compared with many early projections for losses of 1% to 3%.

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Also, a lot of companies have raised their guidance this earnings cycle, more than most analysts had thought. That’s a good sign for corporate health, and long-term investors might want to watch those companies closely to see if they can carry through on their optimism.

We’re far from done with earnings, and Thursday is another busy day. Qualcomm (NASDAQ:QCOM) reported after the close and Verizon (NYSE:VZ) was among the companies reporting this morning. QCOM shares got slammed as investors contemplated the company’s lower-than-expected guidance for Q4.

VZ shares moved higher in pre-market trading as the company lifted guidance, while Yum! Brands (NYSE:YUM) also received a warm reception from investors as revenue from Taco Bell and Pizza Hut both rose in the quarter. Also, KFC sales did well in China, rising double-digits.

General Motors (NYSE:GM) also reported what appear to be nice earnings this morning, beating Wall Street’s earnings per share and revenue estimates. However, the company’s business in China is under clear pressure. That plays into what we’ve talked about. The theme of this earnings season appears to be: Domestic good, international bad. Except when it comes to fried chicken, evidently.

If you need more proof of Powell’s comments having a market impact, consider looking at the CME FedWatch tool.

Chances of two more cuts this year now stand at just 38%, according to CME futures, down from close to 60% a week ago. Chances of a cut at the September meeting are now 50%, down from more than 70% last week.

You could argue that there’s a high probability of at least one more rate cut this year, but a second one after that really comes a lot more into question. Based on what Powell said, it appears that it’s going to be all about what the numbers tell us. As of now, the numbers are kind of murky. You could make as good an argument for a rate hike as for a rate cut.

It also goes back to what we said a few weeks back about rate cuts: They’re not necessarily good news. If the Fed cuts rates, that implies it has worries about the economy. What Powell said yesterday, however, implied that he’s more concerned about the possible impact of overseas weakness than any organic issues in the U.S. That implies the rate cut was pre-emptive, because Powell still sees a lot to like about economic performance here at home. The Fed might just be worried that Europe and China’s problems could start having a bigger impact here.

Powell also mentioned the trade situation, noting that some U.S. companies are cautious about their capital spending due to uncertainty on this front.

The dollar, which has been on a roll lately, leaped to new two-year highs early Thursday in light of the Fed not promising more rate cuts. That helped send commodity prices lower. Crude fell more than 1%.

It’s probably not surprising to see volatility zoom up on a day like Wednesday, and it did. The Cboe Volatility Index (VIX) marched back above 16, a level it hadn’t seen in nearly two months and well above the lows below 12 it posted last week.

VIX could continue to be interesting, which might come as good news to short-term traders who make their living off of high volatility. One reason to possibly expect continued elevation in VIX is that the Fed’s silent period is over. After a meeting, it’s the “Fed on Tour,” so to speak, with Fed governors speaking at various events. When they start making statements, sometimes contradicting each other, that could raise intraday volatility over the next few weeks.

The idea of them contradicting each other would usually be unexpected, but since two voters at the Federal Open Market Committee (FOMC) meeting this week dissented from the rate cut decision, there’s probably going to be some different viewpoints coming out. One of the biggest surprises of this FOMC meeting was seeing two vote against the decision.

History shows that over the last 20 or so rate decisions, both up and down, the average number of dissenters is less than one. So to see two Fed voters disagree with a rate cut that’s been telegraphed for two months is a real head-scratcher. It may have been one of the factors that led to the sell-off Wednesday, because it’s another sign that further easing likely faces strong opposition.

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