Wall Street reassesses Yellen speech, makes U-turn

Did Wall Street initially misread Federal Reserve Chair Janet Yellen’s remarks on the timing of interest rate hikes? Thursday’s stock market rebound, erasing most of Wednesday’s $150 billion paper loss, suggests they did.

Thursday’s action was a mirror of Wednesday. The Dow Jones industrial average rose 109 points, or 0.7%, to 16,331, regaining most of Wednesday’s 114-point loss.

Investors reassessed their initial analysis that it is a foregone conclusion that the Fed will start to raise short-term interest rates sooner than expected next year.

Traders also second-guessed the knee-jerk reaction that says rising rates a year from now is a bull killer, especially with fresh evidence the economy is regaining vigor. Leading economic indicators, manufacturing in the Philadelphia region and initial jobless claims beat expectations.

Sam Stovall, chief equity strategist at S&P Capital IQ, thinks investors realized they overreacted for two reasons. “No. 1, (investors realized) rates wouldn’t begin to rise for a year at the earliest. No. 2, (they concluded) that higher rates would be a sign of a recovering economy.”

The Yellen-driven sell-off on Wednesday was due to the market’s interpretation of a comment she made related to when the Fed might start raising short-term rates, now pegged near 0%. Yellen said increases could begin “six months” after the end of the Fed’s bond-buying program, scheduled to end in October or December. The new timetable for rate cuts was fast-forwarded to April or June of 2015, earlier than a late2015 date investors had priced in.

Thursday, Wall Street got to thinking a Fed move to hike rates isn’t the end of the world, says Bill Stone, chief investment strategist at PNC Asset Management. “Despite the change in guidance, an increase in short-term rates due to better economic activity is certainly positive for stocks.”

Any rate increases will come slowly, adds Mark Luschini, chief investment strategist at Janney Montgomery Scott. “Investors have had some time to realize that even if the Fed begins to raise rates in mid-2015, that pace will likely be glacial.”