The stock market's recent rally paused after Federal Reserve Chair Jerome Powell cast doubt on an interest rate cut at the next meeting. While the S&P 500 closed flat and the Dow declined, the tech-heavy Nasdaq recorded gains, driven by strong performance in AI-related companies.
Key Takeaways
- Federal Reserve Chair Jerome Powell indicated a December rate cut is not certain, surprising markets.
- The S&P 500 ended flat, and the Dow Jones Industrial Average fell 0.2%, breaking a four-day winning streak.
- Technology stocks, particularly those linked to AI, saw significant gains, with Nvidia reaching a new record high.
- Bond markets reacted strongly, with the 10-year Treasury yield seeing its largest gain on a Fed decision day this year.
- Interest-rate sensitive sectors like real estate and small-cap stocks underperformed.
Powell's Comments Shift Market Expectations
Wall Street spent most of the day heading for another record high, extending a four-day winning streak. However, market sentiment shifted abruptly following comments from Federal Reserve Chair Jerome Powell.
During his press conference, Powell stated,
“A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.”This statement directly contradicted widespread market expectations for further rate cuts in the near future.
The S&P 500, which had been up, ended the day flat. The Dow Jones Industrial Average dropped 74 points, or 0.2%, ending its four-day positive run. The Nasdaq Composite, however, managed to climb 0.6%, showcasing a divergence in market performance.
Market Reaction Snapshot
- S&P 500: Flat
- Dow Jones: Down 0.2%
- Nasdaq Composite: Up 0.6%
- 10-year Treasury yield: Rose 0.074 percentage point to 4.056%
Bond Market Sees Significant Movement
The bond market experienced a particularly strong reaction to Powell's remarks. Treasuries sold off across the board. The yield on the 10-year Treasury note increased by 0.074 percentage point, reaching 4.056%. This marked the largest gain on a Fed decision day this year.
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, noted, "The knee-jerk reaction of the markets to the Fed meeting (and press conference) was to sell stocks and bonds, because Chairman Powell said that an additional rate cut in December wasn’t a sure thing." He believes this presents a buying opportunity, anticipating significant rate cuts over the next year despite the Fed's current stance.
Tech Stocks Defy Broader Market Decline
Despite the broader market's dip into negative territory, technology stocks continued their upward trajectory. This resilience suggests that optimism surrounding artificial intelligence (AI) remains strong, even amidst uncertainty about interest rate policy.
Nvidia, now valued at over $5 trillion, remained in the green after hitting a new intraday all-time high. Other chip rivals like Advanced Micro Devices (AMD) and Broadcom also reached new records. Data storage firms Western Digital and Seagate, which reported strong earnings, also saw gains, as did Palantir Technologies.
Google and YouTube owner Alphabet, scheduled to report its latest results after the close, also saw its shares rise. This continued strength in the tech sector is a clear indicator that the AI revolution is a powerful driving force for investors.
AI vs. Dot-Com Bubble
Federal Reserve Chair Powell acknowledged that the current AI revolution appears different from the dot-com bubble of the late 1990s. He noted that many companies during the internet mania were "ideas rather than companies" and part of a "clear bubble." Today's leading tech companies, however, possess actual earnings and established business models, suggesting a more grounded rally.
Interest-Rate Sensitive Sectors Feel the Pain
The prospect of fewer rate cuts in December directly impacted interest-rate sensitive areas of the market. The small-cap Russell 2000 Index fell 0.6%, underperforming the S&P 500 and Nasdaq Composite.
The real estate sector experienced the most significant losses among the 11 S&P 500 sectors, declining more than 2.6%. Financials and materials both slid over 1.5%, while the consumer staples sector was also among the top laggards, dropping 2.3%.
Markets are now pricing in a 67% chance of a December rate cut, a notable decrease from the approximately 91% chance observed just the day before the Fed meeting, according to the CME FedWatch Tool. This shift reflects the impact of Powell's cautious statements.
Federal Reserve's Balance Sheet Adjustments
In addition to interest rate discussions, Powell also touched upon the Federal Reserve's plans to adjust its balance sheet. The central bank intends to align the maturity of its balance sheet more closely with the maturity of the Treasury market.
Currently, the Fed's balance sheet has a weighted average maturity of around 107 months. In contrast, the average maturity of outstanding marketable debt is approximately 72 months. This means the central bank has been holding a larger proportion of longer-duration debt, specifically debt maturing in over a decade.
Powell stated that policymakers agree the balance sheet should better reflect outstanding Treasuries. He believes this shift will not be noticeable in market conditions. Benson Durham, head of global policy and asset allocation at Piper Sandler, noted Powell's emphasis on achieving a balance sheet composed solely of Treasuries with a weighted average maturity matching U.S. Treasuries outstanding, without impacting market prices.
- Market Volatility: Investor expectations for rate cuts were high, leading to a sharp reaction to Powell's cautious tone.
- Tech Resilience: AI optimism continues to fuel growth in the technology sector, differentiating it from broader market trends.
- Sectoral Impact: Interest-rate sensitive sectors are experiencing pressure from the revised outlook on monetary policy.
- Balance Sheet Strategy: The Fed plans to align its balance sheet's maturity with the Treasury market, a technical adjustment not expected to affect market conditions.
