Market Shrugs off Pessimistic Reading of Fed Minutes

U.S. stocks began Wednesday’s session with optimism and sent market averages higher by 1% at the open. The session continued, and the day’s trading range remained tight in anticipation of, and even after seeing, the published minutes of the Fed meeting last month. The market’s reaction was a bit surprising considering the change of outlook represented within the minutes compared to what some analysts and pundits had stated shortly after the last Fed meeting. 

After the FOMC meeting on July 18 of this year, many analysts had the idea that the Fed would announce a rate cut as part of a series of rate cuts yet to come. However the minutes showed that only two voting members of the Fed felt that way, and that a majority of them considered the rate cut a re-calibration and not the beginning of a series of cuts. 

This nuance could imply a very significant change in the minds of investors. If investors expected that the Fed will cut rates again and again over the next several months, they might price this factor into their expectations. If they thought the Fed might not cut rates at all, or even increase rates, that would lead to a very different expectation about the outcome for stocks. As the chart below shows, the move in the S&P 500 index after the publication of the minutes barely registered. In fact the market closed very near the same price level as the moment before the publication was released. Which leads to a conclusion that either markets may react very strongly tomorrow as the information sinks in, or, more likely, that market participants weren’t pricing in continued rate cuts after all.

Lowes Companies, Inc. (LOW) surprised investors with an early Christmas gift. The home-improvement store chain posted better-than-expected earnings, and investors responded by sending the stock over 10% higher on the day. Following on the heels of The Home Depot, Inc.’s (HD) positive report and Target Corporation’s (TGT) surprising success, it appears that he retail sector has some newfound vigor – at least among a few companies.

The sector overall has lagged since the beginning of summer. The retail-sector index is tracked by various exchange-traded funds (ETFs), with one of the more notable being the SPDR S&P Retail ETF (XRT). While the value of this ETF has fallen 10% or more in the past three months, certain companies have bucked the trend.

In addition to the home-improvement stores and Target, AutoNation, Inc. (AN), Dollar General Corporation (DG), and Walmart Inc. (WMT) have shown surprising performances. This attests to the fact that retail in America is far from dead, but picking the companies that know how to survive and thrive is key for investors if they want to harvest gains from this sector in the upcoming months.  

Nervous investors have shown that they prefer defensive investments – stocks in companies that will likely have customers even if a recession comes around. Perhaps for this reason it is no surprise that fast food companies are doing well so far this year. 

With the recent drop in stock market prices, the S&P 500 has managed less than a 5% gain compared to its level six months ago midway through March. During that same time, McDonald’s Corporation (MCD), The Wendy’s Company (WEN), The Coca-Cola Company (KO), and PepsiCo, Inc. (PEP) have outperformed the market by double or triple. This kind of performance certainly makes investors hungry for more.

The publication of the Fed meeting minutes failed to excite investors enough to move markets within today’s session. If investors don’t panic overnight, it is likely a bullish sign going forward. Some retail stocks have unlocked the key to surviving in a post-Amazon.com, Inc. (AMZN) world, and fast food stocks still look yummy these days.

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