Investors look to build on Wednesday’s post-Fed announcement as equity index futures are trading higher. The S&P 500 rallied back to its all-time high yesterday afternoon and if the index follows its futures premarket moves, it could set a new record. The Fed’s announcement on tapering and interest rates appears to have reduced some of the uncertainty investors were feeling because the VIX (Cboe Volatility Index) had fallen more than 4% to 18.5 in premarket trading.
The European Central Bank is zigging despite the Federal Reserve zagging. The ECB announced plans to boost its bond purchases and provide more stimulus and liquidity to European economies. Several European countries are looking for stimulus because many of them are under heavy pandemic restrictions. However, the ECB plans include a tapering of its bond-buying program in March.
While the ECB stimulates, the Bank of England (BoE) becomes the first major central bank to raise rates since the pandemic. The United Kingdom had seen its highest inflation rate in almost a decade at 4.2%. However, with Omicron rapidly spreading throughout the United Kingdom, and the government increasing restrictions on businesses and consumers, many analysts were expecting the BoE to hold off on raising rates. Apparently, the BoE saw inflation as a bigger risk and went ahead with the rate hike.
European countries aren’t the only ones concerned about Omicron; Apple (NASDAQ:AAPL) announced it would delay its “back to work” plans. This could be a common story over the next few months if COVID-19 cases surge.
A couple of stocks announced earnings before the open. Accenture (NYSE:ACN), Rivian (NASDAQ:RIVN) and Jabil (NYSE:JBL) all reported better-than-expected earnings and revenues. Accenture rallied 9.49%, Rivian rallied 1.86% and Jabil rallied 3.25% in premarket trading. However, Adobe (NASDAQ:ADBE) was down 6.48% in premarket trading after meeting earnings estimates.
After the close on Wednesday, Lennar (NYSE:LEN) reported that it missed on earnings and revenue due to higher lumber costs. It was trading 6.37% lower before the bell. Lumber costs could continue to rise because the November housing starts came in much higher than expected. While this indicates more business for homebuilders, it also indicates more demand for lumber.
Looking to the friendly skies, Delta Airlines (NYSE:DAL) adjusted their forward earnings projections. The company is now forecasting a “meaningful” profit in 2022. This is a good sign as airlines are still being hit hard with fallout around COVID-19 pandemic policies. However, some of the skies aren’t so friendly, Airbus was able to steal away Qantas from Boeing (NYSE:BA). Boeing is trading slightly lower before the open.
Fed Actions
As expected, the Federal Reserve increased its tapering plans on Wednesday from $15 billion per month to $30 billion per month. What that means is that the Fed has been stimulating the economy and providing liquidity by purchasing $80 billion in Treasuries and mortgage-backed securities. The Fed was planning on reducing the buying program by $15 billion per month, because the economy is strong, and the stimulus appears to be causing inflation. Today, the Fed decided to speed up its tapering plans by reducing the bond-buying program by $30 billion per month. At this rate, the Fed could be done with its stimulus by March.
The Fed also kept the federal funds rate unchanged and said it planned to keep the rate low until it sees signs of full employment. The Bureau of Labor Statistics (BLS) “defines full employment as an economy in which the unemployment rate equals the non-accelerating inflation rate of unemployment (NAIRU), no cyclical unemployment exists, and GDP is at its potential. The full-employment assumption links BLS projections to an economy running at full capacity and utilizing all of its resources.”
However, with the unemployment rate at 4.2%, employers are struggling to find people to fill positions, and payroll costs are rising at an average of 3.9%. These conditions led many analysts to conclude that the United States is already at full employment. Nonetheless, the Fed does project that full employment would occur in 2022 and projected that the federal funds rate would reach 0.9% by the end of 2022, which would likely result in about three rate hikes in 2022.
Finally, the Fed projected that inflation would pullback significantly by the end of 2022 as stimulus is ended, rates rise, and the negative effects for COVID-19 lockdowns are resolved. During the press conference, Chair Jerome Powell was able to address his critics that thought the Fed was behind the inflation curve, in which he disagreed although admitted that inflation had become a bigger issue than he had expected because of the effects of COVID-19.
Despite the Fed’s announcement, the 10-year Treasury yield hasn’t been able to break the 1.5% mark. However, financial stocks rallied on the news yesterday and are pointing higher before the open.
Central Banking Variants
Later this week, other major central banks will meet to discuss their respective policy approaches. We heard from the European Central Bank (ECB) and the Bank or England (BoE) this morning, but the Bank of Japan (BoJ) delivers its decision Friday. The BoJ is expected to remain accommodative in its interest rate policy because it’s seeing almost no inflation. Japan hasn’t had the same kind of demand for products and goods as other countries because the Japanese don’t see wage increases like U.S. workers do. In the United States, companies are expecting to see a 3.9% increase in wages over the next year. But in Japan it’s difficult to change jobs, so there are fewer pressures to increase wages to attract or keep talent. The difficulties in gaining wage increases is one reason demand and therefore prices remain low in Japan. The Japanese tend to be more cost conscience, and businesses that raise prices have a tendency to quickly lose customers. 
Micro Defense: While the major indices rallied on the Fed’s announcement, defensive sectors like health care, utilities and real estate were still among the market leaders. Insurance companies tend to be a favorite among income investors and can gain popularity as investors get more defensive. Insurance stocks have been the second-best performer at 5.4% in the financials sector in Q4 behind the diversified financial industry group. Insurance is another of those items that no matter how the economy is performing, consumers must have it. Therefore, if defensive sectors like utilities, real estate, and consumer staples continue to perform well, insurance companies could rise with them.
Getting Technical: Stocks had a hard time responding to the Fed’s announcement at first. As Powell talked, it become increasingly clear that he was not worried about long-term rates and felt that inflation would subside in 2022. The news seemed to help technology stocks. The Technology Select Sector Index ($IXT) rallied 2.75%, adding to its four-day rally.
The Fed has gone out of its way to telegraph to the market its plan concerning interest rates. You may remember that interest rates are an important tool in calculating stock valuations. With the Fed targeting 0.9% by the end of 2022, it’s not much of a move higher in reality. Therefore, valuations may not be as high as some investors had feared. This could be the reason tech stocks have rallied and could provide additional reasons for being bullish.
Was Santa Fed?: With the Fed announcement out of the way and with some of the uncertainty around its plans eased, the bulls may find less resistance. In fact, the S&P 500 appears to be right at a resistance level around 4700. If the market follows through and breaks resistance, it could signal an early start to the Santa Claus rally.