Stocks fell on Wednesday as investors considered a key monetary policy decision from the Federal Reserve, which reflected more policymakers forecasted interest rate hikes in the next two years. The Dow dropped more than 300 points, or about 1%, just after 2 p.m. in New York before cutting some losses during Federal Reserve Chair Jerome Powell's press conference . Both the S&P 500 and Nasdaq also declined. Treasury yields surged, and the benchmark 10-year yield broke back above 1.56%. Zor Capital Managing Director Joe Fahmy and Hal Reynolds, Chief Investment Officer, Los Angeles Capital.
SEANA SMITH: Just two minutes to go here until the closing bell. We have Joe Fahmy, he's at Zor Capital, Managing Director there. And we also have Hal Reynolds, Chief Investment Officer with Los Angeles Capital, to help us break down the action that we saw today. But let's take a look at where things stand here in the final couple minutes of trading.
We had the Dow off 266 points. It was off 382 points earlier today after we got the updated projection on inflation and also the potential timing of rate hikes. The dot plot spooked investors just a little bit. But after we heard from Fed Chair Jay Powell at the press conference basically saying that the dot plot projections should be taken with a, quote, "big grain of salt" and that the liftoff is, quote "well into the future". That helped ease some of the concern that we saw from investors here, Adam. And we're looking at the Dow now off just around 266 points.
ADAM SHAPIRO: You know, one of the things that Jay Powell said too because there's this concern about inflation, but he said in regards to that it's a quote, "perfect storm of very strong demand and limited supply" and he used the example that Myles Udland wrote about on the Yahoo Finance platform about lumber prices. We saw lumber prices shoot up but they are now coming down. And what the Fed is expecting because there's no guarantee, but the Fed is expecting that what we're seeing with inflation, whether it be PCE or core PCE at 3% or more, they do expect that to be tempered in the next couple of months. But that's one of the things investors are trying to get ahead of. We saw the yield on the 10-year jump about 10 basis points from where it had been yesterday and now it's at 1.56. So a lot of people wondering about this, Seana.
SEANA SMITH: They certainly are. We have the 10-year yield up just around six basis points right now. Again, the Dow worst performers today, we have Dell Inc, Walmart, and 3M.
ADAM SHAPIRO: And we have a closing bell. We're going to get the gavel in and we can put all of it into the history books, along with the comments from Federal Reserve Chairman Jay Powell. He did have a lot of comments that moved markets today. But not enough to get us into the green. It looks as if we are going to settle down on the Dow 264 points, S&P 500 off about 22 points, and the NASDAQ off about 33 points. Sectors that were in the green today, just one, consumer discretionary up about 0.25%, a big drop for consumer staples off 1.2%. And we also saw energy down about 0.5%. Let's go to our guests because there's a lot to deal with here. And Hal, let's start with you, you know, what we saw with the increase in the 10-year were the people who are selling bonds today overreacting?
HAL REYNOLDS: You know, I think probably not. You know, what I found most interesting in the Fed statement sort of two things A, they increased their inflation assumption to 3.4%. So that was a significant increase over where they'd been three months ago. And then they also confirmed something that we already know, which is they're not even really talking about raising short-term rates and that the focus is going to continue to be on asset purchases. And so basically, what you're telling the world is you're in a money market fund, you're going to lose 3.5% this year and the yield curve is going to be very steep. So I like that for financials. That's going to help financials.
SEANA SMITH: Joe, what did you think of what we heard from Powell when he was talking about how the dot plot, we needed to take that with a grain of salt. It's too early to start thinking about this. Is it still too early when we have such strong data coming out month after month and it really shows that the economy is starting to pick up steam?
JOE FAHMY: Yeah, I feel like it's the same story in the last recent Fed meetings where everyone is very stressed out and they're worried about the tapering and they're worried about raising rates, but they've made it perfectly clear, they're not raising rates any time soon. And to the other guest's point, even if they taper, maybe they go from $120 billion down to $80 billion, it's still very accommodative. So I think there's way too much drama and stress about something that's going to happen in 2023. I haven't even planned dinner tonight, so I don't even know why there's this much drama about it when the overall environment is incredibly accommodative for equities and will remain that way till the end of the year.
ADAM SHAPIRO: Joe, the drama begins when you have the fight over who's doing the dishes, but here was the quote in regards to what you're saying, "the real near-term discussion that will begin is the path of asset purchase reductions". That came after he said, "we should retire the term about talking about talking about". So at some point, they're going to stop buying $40 billion worth of mortgage-backed securities and $80 billion worth of US Treasuries. But that still appears to be what, at least a year off?
JOE FAHMY: Yeah, I think they won't start that until early 2022. But then aside from the tapering in the purchasing the buying of securities, the bond buying, is that the interest rates are still pretty much near zero and there's no signs of that. I think they priced in from the dot plots two hikes in 2023. So even if they do taper, again, the interest rate picture is still very low. And they will telegraph everything. I think Powell has made it perfectly clear he would rather be late than be early and make sure everything from this pandemic has recovered fully.
HAL REYNOLDS: You know, I might just add to that. I agree with Joe, he'd rather be late than early there's no doubt about it. He's fighting the last battle which oftentimes is hard to avoid. But you know, I think we have to be a little careful not to be overconfident that we won't see tapering until 2022. There's one thing Chairman Powell does a good job of, he talks about the great difficulty of forecasting and all of the uncertainty surrounding it. So to me, he's living in the present, clearly, he cares more about jobs and inflation, that's come through very clearly but you know, I think there's-- they're going to react to data as it comes in this year.
I asked the question, how would today have turned out differently had rates not fallen 25 basis points? That's the 10-year Treasury. Had that not happened and had not lumber prices and other commodities come down in a dramatic fashion the last couple of weeks, how would that have changed today's discussion? And I don't know the answer to that. But I think the important thing to remember is they're living in the moment. They're looking at current data. It's clear what their goals are. And it's clear what tools they're going to employ going forward.
JOE FAHMY: Yeah, I wanted to add one more point--
SEANA SMITH: Jared, what do you make of the reaction-- go ahead.
JOE FAHMY: Sorry. If I can add one more point, he's making a great point about I'm not being complacent about it because there will still be data points and CPI and so forth that can cause some volatility you know, over the next few months. So that's something that investors do have to keep in mind.
SEANA SMITH: Jared, let me get your thoughts real quick from the floor of the New York Stock Exchange when you're just taking a look at the reaction that we saw in the broader market today. Yes, we're in the red, we're well off the lows of the day. Is there a sense down there from the traders that this was a bit of an overreaction to what we got from the Fed?
JARED BLIKRE: Well, let's take stock of the reaction. The Dow finished the day not even 1% off and I'll repeat my statement from earlier, that it was telling that the 2:00 PM announcement got more volatility than the presser. I think when the dust settles here you know, what are we going to focus on tomorrow? We're still going to be talking about this, but we're in an earnings vacuum right now. The second half of June one of the most seasonally weak periods of the year because it's summer, not a lot of news out. So I guess my question for you, Joe, because you write about this kind of thing, what are you seeing for stocks over-- in the short term, over the next few weeks until a month maybe when we get into the next earnings season?
JOE FAHMY: Yeah, that's a great point that we still have to get through the seasonality of the end of June, where usually it takes a day or two for people to digest the Fed statement and the press conference. So we have to digest the Fed meeting from today. You also have to get through the Russell rebalancing, which the annual rebalancing takes place on June 25th. And then you have normal end of the quarter for some of the passive managers, normal portfolio adjustments that can lead to added volatility. But I think coming out of that once we get through that seasonally weak time, now we can start to look forward to some of the fundamentals and the earnings season that's coming up. And then you might start to get a run-up in anticipation of the next quarter of earnings releases.
ADAM SHAPIRO: Hal, you actually have written about this you know, at the beginning of the year, everyone was talking about time to get out of growth and go to value. Then it looked as if maybe that wasn't the play. And yet in fact you still believe it is the play, right?
HAL REYNOLDS: You know, we do. And we do in part for the reason that everyone states, and that's valuations. But also analyst sentiment continues to grow for value. It's sort of interesting, if you look at different economic regions around the world, analyst sentiment is better for value in every region except large caps in the US. And the only reason why it's still slightly better for growth is because of 10 names, the 10 mega-cap stocks. If you equal weight the two indexes, Russell 1 Growth and 1 Value, analysts' sentiment is stronger for value.
So anyway, so we still like value. And for the reasons I talked about earlier, I think we're going to have a steep yield curve for some time to come. I think it's going to get steeper. I think rates will go up. There's no doubt in my mind the Fed has distorted absolute rates and also credit spreads through their actions and their statements this year. And the good news is we've got a robust economy. And let's hope that continues. But yeah, we still like the value side of things.
SEANA SMITH: Joe, what do you like in this environment? And anything you heard from the Fed today that makes you change your strategy or your approach to some of these investments right now?
JOE FAHMY: Being more of a growth manager, I like to gravitate towards the growth stocks, especially as the NASDAQ has been in a correction the past four months the sectors that are either coming back quickly or have held up very well and specifically, those three sectors are semiconductors, medical products, and software. We're noticing some names coming back. Of course, if the 10-year yield does rise and maybe gets back towards those pre-pandemic highs, 1.9, that would affect valuations but for now, at around 1.5 I still think that it's a favorable environment for those growth sectors.
ADAM SHAPIRO: Jared, you got a final thought on this?
JARED BLIKRE: I'll tell you what, I think we might be on the verge of a trend change here. I'm really interested to see what the bond market does tomorrow and especially that Russell rebalance on Friday. That's another kink in the markets, but usually, that's not a market-moving event. I think it's going to be a quiet two weeks here and we might see some more rotation, but I really want to see if that trend gets underway with bonds and also the dollar shot up. If the dollar rises materially that has huge implications for the overall markets.
SEANA SMITH: All right, Jared Blikre, thanks so much. And of course, our thanks to Joe Fahmy, and Hal Reynolds as well.