Four days of mild gains offset by a day of modest losses led to a quiet week. For the week the S&P 500 gained 0.4%, the NASDAQ fell 0.3% while the Russell 2000 was the standout with a gain of 1.3%. The Federal Reserve did announce the long awaited draw down of it’s balance sheet which was of no surprise – and the market’s reaction was muted. The Fed ended it’s massive bond buying program in 2014, but continued to reinvest maturing bonds to keep the balance sheet from shrinking.
This ‘unwind’ is a pin prick in the $4.5 TRILLION balance sheet. (starting at a pace of $120 BILLION a year).
The U.S. central bank kept interest rates unchanged, as widely expected, but said it would start to shrink its balance sheet by $10 billion a month. The Fed also signaled a December rate increase remains on the table as the central bank embarks on an unprecedented unwind of crisis-era asset purchases that had helped to buoy markets over the past decade.
The Fed committed to reducing the bonds they own at a pace of $10 billion a month and increasing that pace by $10 billion every three months to a maximum pace of $50 billion a month, or $600 billion a year.
Of course if the market ever drops 10% they will rush to the market’s assistance and say “sorry, we’ll slow down or stop this immediately!”
“I’ll admit that it feels a little surreal that this Federal Reserve with its addiction to manipulating markets is actually trying to kick the habit. The unwinding of the balance sheet will dominate markets for at least the next two years and cements our outlook for higher rates,” said Bryce Doty, senior portfolio manager at SIT Investments, which manages some $7 billion.
Economic news this past week was sparse and obviously not market moving; one interesting report was existing home sales which are stagnating a bit due to lack of supply.
Wednesday a reading on existing-home sales for August showed that sales dropped for the fourth time in five months as real-estate agents continue to blame a lack of available homes to buy. The National Association of Realtors said existing home sales fell 1.7% to a seasonally adjusted rate of 5.35 million.
Here is the 5 day weekly “intraday” chart of the S&P 500 .. via Jill Mislinski.
The week ahead…
Not much on the event horizon out there – there will be many Federal Reserve members trotted out to the public in speeches; Yellen is set to give a speech on Tuesday. Maybe one of them says something of note. Economic news likewise doesn’t appear to be market moving. Trump will announce the guidelines of his tax reform Wednesday which could get a knee jerk reaction from markets – expect proposed tax cuts to be hyuuuuge.
Short term: The S&P 500 held its breakout – needs some time for that 20 day moving average to catch up. The NASDAQ failed to break to new highs as some money rotated into small caps.
This looks a bit more encouraging for the Russell 2000 – the end of the week saw a return to old highs.
The NYSE McClellan Oscillator remains in all systems go territory.
Long term: The 5 year charts remain in unicorns and butterflies mode for bulls.
Charts of interest / Big Movers:
Monday, Orbital ATK (OA) jumped 20% after Northrip Grumman announced a deal to buy its rival defense contractor for $7.8 billion in cash.
It was a week. Therefore, a brick & mortar retailer had to feel some pain – this week it was Best Buy (BBY) which dropped 8% Tuesday after its earnings outlook fell short of expectations.
Bed Bath & Beyond (BBBY) has nearly the exact same symbol as Best Buy and likewise took it on the chin Wednesday as it slumped nearly 16%, marking its lowest close since 2009 and its second worst drop on record, after the retailer late Tuesday released earnings that widely missed forecasts.
Wednesday, Alnylam Pharma (ALNY) investors won the biotech poker bet of the week as the stock soared 52% after positive results in a late-stage trial.
Thursday, Calgon Carbon (CCC) soared 62% after the maker of air- and water-purification products reached a $1.1 billion deal to be bought by Japan’s Kuraray.
Dip buyers returned to Equifax (EFX) this week.
Have a great week and we’ll see you back here Sunday!