Stock Traders ‘Sell the News’ After Fed Goes Big: Markets Wrap

(Bloomberg) — A rally that briefly drove stocks to their all-time highs bumped into a wall as the Federal Reserve signaled it’s not in a rush to ease policy after cutting rates by a half-point.

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The S&P 500 wiped out a gain of 1% as Jerome Powell cautioned against assuming big rate cuts would continue. While that’s not necessarily bad given that aggressive easing is usually associated with economic stress, traders ended up pushing equities near session lows at the 4 p.m. New York close.

“After a rally ahead of today’s Fed announcement, it wouldn’t be unreasonable for the market to pull back a bit,” said Bret Kenwell at eToro. “However, the long-term outlook remains promising. So long as the economy holds up and inflation doesn’t roar back to life, lower rates and strong earnings growth can continue to drive stocks higher over the long term.”

To Ian Lyngen and Vail Hartman at BMO Capital Markets, Powell’s press conference was consistent with the magnitude of the cut and effectively communicated that officials aren’t particularly worried about any aspect of the real economy at the moment.

“It’s impressive that in the classic, ‘buy-the-rumor, sell-the-fact’ dynamic, the ‘fact’ of a 50 basis-point cut was still met by selling. Positions are being squared and the market is moving back into the mode of trading the incoming economic data with an eye to the potential influence from the presidential race.”

The S&P 500 fell 0.3%. The Nasdaq 100 dropped 0.5%. The Dow Jones Industrial Average lost 0.2%. A gauge of the “Magnificent Seven” megacaps slid 0.1%. The Russell 2000 of small firms was little changed.

Treasury 10-year yields advanced six basis points to 3.7%. The dollar rose.

In contemplating the market reaction to a half-point cut coming into the meeting, some expected the reaction to be positive because of the benefit to the economy, some expected a drop due to ‘what do they know that we don’t know’ logic, according to Mark Hackett at Nationwide.

“The lack of directional move was the least likely outcome, but it is the one that we got,” Hackett said. “The S&P 500 is having a difficult time breaking through July’s record high, and the more failed breakouts that we observe, the more difficult one will be to achieve.”

To Chris Larkin at E*Trade from Morgan Stanley, the markets got what they wanted — a big first cut by the Fed.

“The Fed has a well-deserved reputation for not rushing, so there’s the potential for some disappointment if it’s seen to be moving too slowly, especially if economic data continues to soften. But today they delivered,” he added.

The market now shows about 70 basis points worth of combined cuts over the remaining two policy meetings this year. The Fed’s projections — known as the dot plot — show a narrow majority favor lowering rates by at least an additional half-point in 2024. Policymakers penciled in an additional percentage point of cuts in 2025, according to their median forecast.

“It now will be a battle between market expectations and the Fed, with employment data — not inflation data — determining which side is right,” said Jack McIntyre at Brandywine Global. “Now, everyone is back to data dependency.”

Jamie Cox at Harris Financial Group says he’s still skeptical of the extent of expected rate cuts next year given that more aggressive reductions are associated with crises.

“We look for traditional beneficiaries including small caps, value, cyclical sectors, and the equally-weighted S&P 500 Index to experience tailwinds,” he noted.

To Krishna Guha at Evercore, the big move out the gates takes out some insurance on the soft landing, is risk on, and should particularly benefit risky assets geared into the cycle, such as small caps, cyclicals, commodities and commodity currencies.

“Despite the skepticism around the economic need for an aggressive 50 basis-point cut, markets can and should only celebrate today’s move – and will continue to celebrate over coming months,” said Seema Shah at Principal Asset Management. “We have a Fed that will go to historic lengths to avoid a hard landing. Recession, what recession?”

“Don’t let the thought of rate cuts scare you,” said Callie Cox at eToro. “The Fed is cutting in celebration of controlled inflation, not in desperation. Don’t give up on the stock market. We think there’s still a chance the Fed saves the job market – and consequently, the economy – with lower rates. And if that happens, the biggest – and most expensive – risk here is to miss an eventual rally led by the unlovable parts of the market.”

Corporate Highlights:

A US security panel has granted Nippon Steel Corp. permission to refile its plans to purchase United States Steel Corp., for $14.1 billion, likely pushing a decision on the politically contentious takeover past the US elections in November, according to people familiar with the matter.
Google won a court fight with the European Union over a €1.5 billion ($1.7 billion) fine for thwarting competition for online ads, partly making up for last week’s crushing defeat in a separate judgment for abusing its monopoly powers.
Qualcomm Inc. lost a European Union court fight over a multi million euro fine over allegations the US firm priced some chips low enough to squeeze out a smaller rival.
T-Mobile US Inc. outlined its growth ambitions for the next three years on Wednesday, forecasting higher profit fueled by customer gains and enhanced by new technologies, including artificial intelligence.
Elliott Investment Management still wants to replace Southwest Airlines Co. Chief Executive Officer Bob Jordan, according to a union official, suggesting changes the carrier has already promised aren’t enough to satisfy the activist shareholder.
23andMe Holding Co. co-founder and Chief Executive Officer Anne Wojcicki told employees that she remains committed to taking the genetic testing company private following the resignation of its independent board members.

Key events this week:

UK rate decision, Thursday
US Conf. Board leading index, initial jobless claims, existing home sales, Thursday
FedEx earnings, Thursday
Japan rate decision, Friday
Eurozone consumer confidence, Friday

Some of the main moves in markets:

Stocks