Inflation: The Fed's New Focus

Stocks resumed to sell-off throughout the day as Federal Reserve Chairman Jerome Powell told the Senate banking committee that inflation no longer looks transitory and that the Fed will consider accelerating its tapering plans before inflation becomes entrenched. Mr. Powell admitted that the Fed had made a mistake in evaluating supply problems that were causing more inflation and that these issues could take longer to be resolved. Additionally, he expressed concern that the Omicron variant could lead to more lockdowns around the globe, which could make supply problems even worse.  

Powell’s comments seemed to confirm the concerns that many investors had about the economy, which pushed an already bearish day even lower. However, as the day went on and investors had time to reflect on the comments, some buying came in and took stocks off their lows. The Nasdaq Composite GIDS fell about 2% before closing 1.55% lower. The S&P 500 (SPX) and Dow Jones Industrial Average ($DJI) had similar reactions, dropping 2% before rallying off their lows and closing 1.90% and 1.86% lower.

Despite the bearishness of the markets, it’s important to remember that the Fed is making these moves because it views the economy as strong and no longer in need of the extra stimulus. At this point, the Fed feels that it’s more important to address the downside of economic strength by moving its focus to inflation. While many analysts will argue about the Fed’s timing is too late or not big enough, many investors may see this move as a vote of confidence for the economy. With the S&P 500 about 2.7% off its November high, the current market action has yet to reach a basic correction territory around 5% to 10%.

Taking Stock

One apple that hasn’t fallen from the tree was Apple AAPL, which rallied 3.16% on the day and closed at a record high. There was no news to drive the stock higher other than investors appearing to see it as a safer stock to own during market uncertainty.

With questions about the severity of the Omicron variant, it’s no surprise that travel stocks have been among the worst performers. The Dow Jones U.S. Travel & Leisure Index ($DJUSCG) dropped 2.32% on Tuesday, adding to its three-day losing streak that totaled more than 6%. Travel sites like Expedia EXPE and Booking BKNG fell 3.25% and 3.67% on Tuesday respectively.

The variant appears to be affecting consumer behavior because CNBC reported that cruise bookings over the Thanksgiving weekend were weaker than expected. Cruise stocks like Carnival CCL and Royal Caribbean RCL closed 2.97% and 0.10% lower, but Norwegian Cruise Line NCLH was down the most at 3.51%. 

CHART OF THE DAY: SUPPORT GROUP. The 10-year Treasury Yield (TNX—left) touched support around 1.42 before trading higher. The S&P 500 (SPX—middle) appears to have more room before it tests support around 4550. Crude oil (/CL—right) could fall a little more than $3 before hitting support around $62. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Hitting the Curve

The 10-year Treasury Yield (TNX) fell 7.65% after the opening. However, Chairman Powell’s tapering remarks prompted the 10-year yield to rally off its lows and close 5.69% lower. A faster taper means the Fed will be buying fewer bonds, and rates will be freer to rise and fall with market demand. Additionally, the faster taper could result in the Fed raising the overnight rate sooner as well. The possibility of the Fed hiking its rate sooner resulted in the 2-year yield rising from 0.20 to 0.21. The rising 2-year and the falling 10-year flattened the 2s and 10s ratio, which is often used to measure the steepness of the yield curve.

One reason yields fell on the open was falling oil prices (/CL). Oil prices slid 8% after the open but it also rallied off its daily low and closed down 4.69%. Elsewhere among the energy markets, natural gas futures (/NG) finished at a three-month low after dropping 5.17%. As one might expect when oil and gas prices fall, energy stocks also fall. The S&P Energy Select Sector Index ($IXE) fell 2.49%.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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