- The Dow turned lower on Wednesday after the tariff rollback hype began to fizzle out.
- Inflation came in close to expectations, making it unlikely that the Fed will stray from its neutral stance.
- One analyst warns that the stock market rally is being fueled by a dangerous catalyst: FOMO.
The Dow Jones broke out its early-week slump on Wednesday, but unfortunately for stock market bulls, the index mounted a hasty retreat instead of pressing further into record territory.
Dow Slips Below its Record High
Wall Street’s three primary indices all fell on Wednesday. The Dow Jones Industrial Average declined 29.18 points or 0.11% to 27,662.31.
One day earlier, the Dow had closed the session completely unchanged for the first time in five years.
The S&P 500 dipped 6.07 points or 0.2% to 3,085.77
The Nasdaq fell 21.08 points or 0.25% to 8,465.01.
Gold ticked higher as equities wavered. At last check, the yellow metal had climbed 0.73%, though it still traded well below the $1,500 level.
Stock Market Fizzles Along With Tariff Rollback Hype
Stocks struggled as investors came to grips with the reality that the US and China have not reached an agreement on tariff rollbacks, and that tariffs may actually increase if negotiators fail to put the long-awaited “phase one” trade deal in writing within the near future.
White House economic adviser Larry Kudlow firmly stated that there would be no tariff rollbacks until an “entire deal” was in place.
Adding to the bearish mood, the Wall Street Journal reports that those so-called “rollbacks” might not even roll back any currently-existing tariffs. Rather, they may just cancel scheduled tariff increases, such as the one set to go into effect on Dec. 15.
President Donald Trump’s closely-monitored speech before the Economic Club of New York did little to reinvigorate bullish appetites, though – quite frankly – those appetites have grown sufficiently ravenous on their own.
This Dow Jones Rally Is Being Driven by FOMO
Writing at Bloomberg Opinion, John Authers warns that the stock market’s latest push to new highs hasn’t been driven by fundamentals.
It is tempting to fit a narrative of economic and trade optimism to the rebound in appetite for risk. But sadly, this looks a lot like a return to the pathology that has dominated throughout the post-crisis decade: markets await free money from central banks, and fear missing out when that money arrives.
As he notes, the trade war narrative remains volatile, and the picture hasn’t fundamentally changed as the months have rolled on. Moreover, there haven’t been many positive economic surprises since the summer. And corporate earnings were lackluster.
Nevertheless, economic sentiment underwent a sudden spike this month. According to Bank of America Merrill Lynch, a net 6% of fund managers predict that the global economy will improve over the next calendar year. That might not look impressive, but just one month earlier, a net 37% of fund managers predicted the economy would deteriorate over the same period.
So what catalyzed the abrupt pivot in investor sentiment? Authers chalks it up to the “age-old fear of missing out” – also known as FOMO.
For all the recession warnings that bears have unleashed since the markets first turned south last year, the economy’s longest-ever expansion continues to chug along. Now, the year is coming to a close, and investment managers who maintained a defensive posture could face a reckoning.
The end of the year is coming, when investment managers will be judged on their performance. Those who are behind have an incentive to clamber into the market now, while there is still time.
That could prime the Dow and the S&P 500 for a classic “Santa Claus Rally,” but it won’t put the markets on solid footing when trading resumes in 2020.
Core Inflation Meets Economist Estimates
On the data front, the US Consumer Price Index (CPI) came in higher than expected, printing a 0.4% for October. Economists had expected a reading of 0.3% after September’s 0.0% print.
Core CPI, which excludes prices in the volatile food and energy categories, met economist estimates with a 0.2% reading.
These inflation data aren’t likely to lead the Federal Reserve to diverge from its cautious policy stance. To wit, Fed funds futures imply a more than 96% probability that the Fed maintains its current interest rate target at the next FOMC meeting in December.
Powell’s Interest Rate Comment Stabilizes Markets
This morning, Federal Reserve Chair Jerome Powell will testify before the Joint Economic Committee.
According to CNBC, his prepared statement informs Congress that interest rates are unlikely to change unless the economy veers from its present course.
The release of that statement helped stabilize the Dow, which had been headed for losses as large as 100 points during the pre-market futures session.
Powell’s hearing is scheduled for 11 am ET.