U.S. stock markets closed lower on Tuesday as the Fed has commenced its last and most vital FOMC meeting of 2021. Market participants remained concerned about a shift in Fed’s monetary policies toward a more hawkish stance from the existing ultra-dovish stance it has taken at the onset of the global outbreak of coronavirus in March 2020. All three major stock indexes ended in red.
How Did The Benchmarks Perform?
The Dow Jones Industrial Average (DJI) dropped 0.3% or 106.77 points to close at 35,544.18. Notably, 17 components of the 30-stock index ended in green while 13 in red. The tech-heavy Nasdaq Composite finished at 15,237.64, sliding 1.1% or 175.64 points due to weak performance by large-cap technology stocks.
Meanwhile, the S&P 500 fell 0.8% to end at 4,634.09. Nine out of eleven sectors of the benchmark index closed in negative territory while two in green. The Technology Select Sector SPDR (XLK), the Real Estate Select Sector SPR (XLRE) and the Industrial Select Sector SPDR (XLI) tanked 1.6%, 1.1% and 1%, respectively.
The fear-gauge CBOE Volatility Index (VIX) was up 7.8% to 21.89. A total of 10.8 billion shares were traded on Tuesday, lower than the last 20-session average of 11.5 billion. Decliners outnumbered advancers on the NYSE by a 2.70-to-1 ratio. On Nasdaq, a 2.59-to-1 ratio favored declining issues.
All Eyes on Fed’s FOMC Meeting
Fed officials are engaged in the last FOMC meeting of this year on Dec 14-15. On Dec 15, at 2:00 PM EST, the Fed Chairman Jerome Powell will give press statement regarding the outcome of the last meeting.
On Nov 30, in his testimony before a Senate committee, Fed Chairman Jerome Powell said that the central bank will discuss speeding up the tapering process of its monthly bond-buy program in the upcoming FOMC meeting. Current inflation is no longer transitory to Fed.
Powell said “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”
Market participants are overwhelmingly expecting the Fed to raise the tapering amount of its monthly bond-buy program from $15 billion to $30 billion. At this rate, the quantitative easing program will terminate in March 2022 instead of June targeted earlier.
The central bank has maintained the benchmark lending rate in the range of 0-0.25% since March 2020. With accelerated tapering, the first rate hike is now expected in second-quarter 2022 instead of second half of 2022 anticipated earlier. Per CME FedWatch, market participants are currently expecting three rate hikes of 25 basis points each in 2022.
Technology Stocks Suffer
A higher interest rate seems detrimental for growth stocks, like from the technology space, as a higher discount rate will reduce the net present value of the investment in growth stocks. Growth stocks are expected to provide higher returns over a longer period. Moreover, these companies depend on easy access to cheaper credit in order to grow their businesses.
Consequently, shares of technology bigwigs like Microsoft Corp.
MSFT
, Adobe Inc.
ADBE
and Alphabet Inc.
GOOGL
tumbled 3.3%, 6.6% and 1.3%, respectively. Alphabet sports a Zacks Rank #1 (strong Buy). You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Economic Data
The Department of Labor reported that producer price index (PPI) rose 0.8% in November compared with 0.6% in October. The consensus estimate was 0.5%. Year over year, PPI jumped 9.6% last month, marking its historic high level since the beginning of this data series on November 2010.
Core PPI (excluding volatile items like food, energy and trade services prices) increased 0.8% in November. The consensus estimate was 0.4%. October’s data was revised upward from 0.5 to 0.6%. Year over year, core PPI climbed 6.9% in November.
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