FOMC hits expectations, stocks retain morning rally
Small-cap stocks generated a solid rally through several minor economic reports this morning and then sustained the upside push through a volatile, but ultimately upbeat reaction to the Federal Open Market Committee announcement, which either stalled or ended a rate cut cycle that began back in September 2007. For the day, the Russell 2000 (NYSE:IWM) rallied 8.38, or 1.18%, to 716.30.
The rally in small caps basically recovered about two-thirds of the big slide from Tuesday, but failed to suggest that the market’s breakdown into a new lower range was premature. It will take a decisive push back above 720.50 to validate any kind of bottoming action from today’s rally, or else it will simply look like a dead-cat bounce amid oversold conditions.
The much-awaited FOMC news fulfilled market expectations, and the rally in stocks in the face of no rate cut to serve up cheap money in difficult times was a decent showing.
As for the announcement itself, “The bottom line is that the Committee is now in a wait-and-see mode to see how the economy and inflation unfold during the second half of the year,” Steven Wood, chief economist with Insight Economics, said in an email.
Wood noted that an improvement in economic conditions should spur tighter monetary policy but that a weaker economy might not prompt further rate cuts unless inflation abates. “We believe that the tax rebate effect on consumer spending will quickly fade as the summer progresses and energy prices stabilize or retreat slightly. This will relieve some of the pressure on the Fed but may still not be enough to cause them to cut rates further unless a recession develops, a possibility we do not rule out,” he said.
Ahead of FOMC, the market did get a little breathing room on the energy price issue and crude oil futures stumbled 1.7% to $134.55 when the weekly inventory data showed a surprising build in crude oil stocks. Despite the slide in energy prices, the dollar was clobbered against the euro, sinking some 0.6%.
Earlier in the session, the market navigated through a series of minor economic reports with relative calm – perhaps because investors were simply on the sidelines waiting for the reading of the FOMC tea leaves. New home sales came in at minus 2.5% and the inventory of new homes stretched out to 10.9 months. While the home sales numbers weren’t a surprise, they certainly didn’t point to any immediate upside surprises for the slumping U.S. housing market.
Within the home market realm, the MBA mortgage application survey came in at minus 9.3%, which was the lowest level since July 2001. In addition, the report showed that the purchasing index fell 7.4% to the lowest point since February 2003. Also, the refinance index tumbled 12.1% to the lowest level since July 2001. With the housing market still soft and rates firming, mortgage activity has slowed to a crawl.
And finally, orders for May durable goods came in unchanged, which was slightly softer than the forecast for a rise of 0.1%. Although durables missed the median forecast, it was close enough to have very little impact on stock market trading.
Earlier today, financial shares were among the best-performing broad market sectors, but by the close investors shifted toward a buying bias for food retail, tires and rubber, publishing, hotels and specialty stores. Meanwhile, fertilizer, aerospace, coal, casinos and oil exploration stocks were out of favor with the bulls.
Small caps of note were highlighted by LCA Vision (Nasdaq:LCAV), which tumbled some 24% as the company lowered the outlook for the second quarter. Apogee Enterprises (Nasdaq:APOG) tumbled 17% after posting disappointing quarterly results.
On the upside, HireRight (Nasdaq:HIRE) climbed 11%, gapping higher following plans to release a new employee screening product. Gateway Financial Holdings Inc. (Nasdaq:GBTS) climbed 11%, recouping some of the sharp recent losses that pushed the share to multi-month lows. Winn-Dixie Stores (Nasdaq:WINN) were up 12.8%, bouncing after hitting five-month lows Tuesday.
Looking ahead to Thursday’s session, the market will get a chance to react to GDP and weekly claims ahead of the regular opening, then existing home sales numbers will be released at 10:00 a.m. ET. In addition, the market will have had a night to sleep over the FOMC stance at what the outlook might mean for stock market investments.
