This week, the Fed finally signaled that the economy might be slowing enough to pause rate increases, and the market rejoiced.
For the week:
S&P 500 +2.1%
S&P Midcap 400 +3.2%
S&P Smallcap 600 +3.9%
June ended basically flat:
S&P 500 0.0%
S&P Midcap 400 -0.1%
S&P Smallcap 600 0.0%
The second quarter was a downer:
S&P 500 -1.9%
S&P Midcap 400 -3.4%
S&P Smallcap 600 -4.8%
Monday saw new home sales for May come in surprisingly strong on the tails of April's strong report. Most economists see a slowdown in housing and expect it to decelerate even more as higher interest rates trickle down and make mortgage borrowing expensive. Other measurements have shown precisely that happening, but new home buyers have yet to pick up the clue.
Strong corporate balance sheets became a positive catalyst, though. Johnson and Johnson (JNJ) made a $16.6 billion all-cash bid for Pfizer's (PFE) consumer unit, which includes well-known brands like Listerine, Nicorette, and Sudafed. Bold moves like that assure the market that companies are confident in the future, making plans, putting resources to work or streamlining operations. That sent the major indices up half a percent.
The Fed released its annual report covering the economy last year and early this year. It scored the economy healthy, but flagged housing as weakening. It also commented on inflation: Core inflation is likely to remain under some upward pressure in the near term from rising costs as the pass through of higher energy prices runs its course. But those cost pressures should wane as the year progresses. Moreover, strength in labor productivity should continue to damp business costs more generally. It mentioned that the December increase of rates to 4.25% was no longer accommodative, confirming that we are now in a restrictive monetary mode.
The recent up, down, up, down pattern of the market continued. Monday was up, so Tuesday was down. Attention turned again to the Fed. The nervousness this time was not about whether the rate would rise or not - that was almost universally expected to happen - but rather on whether we'd get any sense of future action.
The Nasdaq paced the way lower with a 1.6% loss, although the Dow's 1.1% loss was its worst one-day performance in over three weeks. Particularly hard-hit was the already-semiconscious semiconductor sector. Marvell Technology Group (MRVL) said it would buy Intel's (INTC) handheld device processor division for $600 million. Unlike Monday's J&J purchase announcement, this one turned investors off. Marvell dropped 15% because the acquisition will dilute earnings. That means the company is paying more for the division than it expects to add to its earnings. Intel also fell, but by just 1.3%, which was in-line with the general malaise of the market that day.
True to form, the next day in the pattern was up again. Pondering Thursday's Fed announcement was about all there was to guide activity. A small sense of relief could already be felt in the air. No matter what happens tomorrow, it hinted, at least we'll finally know. While not the greatest news, it was slightly better than neutral and got another nudge higher when Wells Fargo (WFC) trumpeted a dividend increase, a 2-for-1 stock split, and a stock buyback. The major indices tacked on half a percent.
Intel roared ahead 3.4% as investors decided that getting rid of the non-performing handheld division would enable the chip leader to focus on its main PC business, which is ramping up nicely. The Kelly Letter bought more shares of Intel at $17 two weeks ago. The company's future looks dandy to me.
Federal Thursday arrived at last.
As expected, the Fed raised rates 0.25% to 5.25%. It was the seventeenth consecutive increase since June 2004.
The good news that brought relief to the market came in the accompanying policy statement. It read that economic growth is easing, inflation expectations are contained, and that slowing demand will help limit upward price pressures over time. That was a soothing salve on the still-burning wounds left by the Fed's anti-inflation speech campaign begun on May 10.
The CBOE Volatility Index, known as the VIX, fell to its lowest level in six weeks. Investors call the VIX the fear gauge. When it's high, investors are scared. When it's low, they're not. Its dramatic 18% drop on Thursday revealed investors buying call options on the belief that the market had hit bottom.
The Dow gained 2%, the Nasdaq 3%, and Intel added another 3.5%.
Friday delivered good news by not delivering bad news. If Thursday's upward surge had been followed by an immediate plunge, it would have invalidated the idea that a bottom had been reached. The plunge didn't come. Instead, the market went almost nowhere, which is positive.
The core-PCE deflator, an inflation gauge watched by the Fed, came in with a 0.2% increase for May exactly as expected. That lead to high-fives all around and a sense that it was time to start enjoying the weekend ahead of next week's 4th of July celebrations.
The market will close at 1:00 p.m. on Monday in observance of the 4th of July. It will open again for business on Wednesday, July 5.