Stocks sink after Fed likely dashes hopes of a rate cut
Stocks gave up some early gains and ended broadly lower on Wall Street Wednesday after the head of the Federal Reserve appeared to play down the possibility of an interest rate cut this year, something some investors had been hoping for.
The Fed’s decision to leave its benchmark interest rate alone was widely expected and came amid signs of renewed economic health, but unusually low inflation. The announcement reaffirmed a message that has reassured investors since the start of the year: No rate hikes are likely anytime soon.
The low-rate policy is helping to keep borrowing costs down and supporting an economy that has been growing steadily since late last year.
“There really wasn’t anything in the Fed statement that should have spooked investors,” said Karyn Cavanaugh, senior markets strategist at Voya Investment Management, adding that a rate cut wouldn’t be an appropriate move against the backdrop of the U.S. economy that grew 3.2% in the first three months of this year and a national unemployment rate below 4%.
“I don’t think investors who were anticipating a rate cut were being very realistic.”
The S&P 500 index fell 22.10 points, or 0.8%, to 2,923.73.
The Dow Jones Industrial Average lost 162.77 points, or 0.6%, to 26,430.14. The Nasdaq composite dropped 45.75 points, or 0.6%, to 8,049.64. The Russell 2000 index of smaller company stocks gave up 14.83 points, or 0.9%, to 1,576.38.
The U.S. stock market has been riding high this year as it has made its way back from a nosedive at the end of 2018. The Fed spurred the market’s recovery earlier this year when it signaled that it would take a patient approach to raising interest rates.
On Wednesday, the central bank once again reassured investors that it is unlikely it will hike rates in coming months. The Fed raised rates seven times over 2017 and 2018.
The Fed also expressed a more upbeat view of the economy, saying “economic activity rose at a solid rate.” In March, the Fed had said it appeared that growth had slowed from the fourth quarter of last year.
“The Fed action is a positive, because it means that rates are going to remain low,” said Tom Martin, senior portfolio manager with Globalt Investments. “And if there was anything that looked like it could be harmful, the Fed is standing ready to consider more accommodation.”
Soon after the Fed issued its statement, stock prices rose modestly. And the yield on the 10-year Treasury note, which influences mortgages and some other loans, fell slightly.
But the trajectory for stocks and bonds changed course as Federal Reserve Chairman Jerome Powell fielded questions from reporters. At one point, he declined to say whether some investors are misguided in expecting the U.S. central bank to trim interest rates this year, something traders have been betting will happen before year’s end.
“The committee is comfortable with our current policy stance,” Mr. Powell said.
The U.S. dollar spiked versus other currencies as Mr. Powell spoke. Bond prices ended up little changed, with the yield on the 10-year Treasury note holding at 2.50%.
Household goods makers, banks and energy companies took heavy losses Wednesday. Real estate stocks had a slight gain.
Stocks had been moving sideways right before the Fed’s announcement. They rallied earlier in the day as large U.S. companies continued to surprise investors with solid profits.
Apple rose 4.9% after its first-quarter results beat Wall Street forecasts. The consumer electronics giant’s sales are still shrinking as iPhone demand weakens, however. Still, Apple raised its dividend and signaled that the revenue slide could level off in the current quarter.
Royal Caribbean Cruises jumped 6.7% after the cruise line operator said booking rates and volumes helped push revenue higher, along with more demand for onboard activities.
CVS Health climbed 5.4% after the company reported a 42% surge in quarterly profits, blowing past Wall Street’s forecasts. The nation’s second-largest drugstore chain also raised its profit forecast for the year.
Beer maker Molson Coors slid 7.5% after a slump in volume weighed down revenue. The company, which makes both Molson and Coors, reported revenue and profit below Wall Street forecasts.
Earnings reporting season is more than a third of the way through and the results have been tempering investors’ worst fears about a severe profit slump. Earnings are down about 0.3% so far for S&P 500 companies. That’s far better than the 4% drop expected just a few weeks ago.