Markets closed mostly higher on Wednesday after the Federal Reserve announced trimming of its balance sheet from October. The Fed also decided to keep the benchmark interest rates unchanged, but, indicated a possible rate hike in December. Such statements led to gains for financial shares and also boded well for banks.
The Dow hit fresh record on Wednesday, rising 41.79 points, buoyed by gains in McDonald’s (MCD - Free Report) and Pfizer (PFE - Free Report) , which gained 1.6% and 1.5% respectively. Meanwhile, the S&P 500 also ended above the 2500 level yet again and briefly hit an intraday high of 2,508.85. Of the 11 major sectors of the S&P 500, seven ended in the green, with financials leading the advancers. Both the companies possess a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Dow Jones Industrial Average (DJIA) closed at 22,412.59, gaining 0.2%. The S&P 500 Index (INX) increased 0.1% to close at 2,508.24. Meanwhile, the Nasdaq Composite Index (IXIC) closed at 6,456.04, decreasing 0.1%. A total of 6.7 billion shares were traded on Wednesday, higher than the last 20-session average of 6 billion shares. Advancing issues outnumbered decliners on the NYSE by 1.26-to-1 ratio. On the Nasdaq, advancers outnumbered decliners by 1.30-to-1 ratio. The CBOE VIX decreased almost 5% to close at 9.68.
Fed to Begin Unwinding its Balance Sheet from October
The Fed announced the much anticipated unwinding of its $4.5 trillion balance sheet at the Federal Reserve Open Market Committee meeting which culminated on Wednesday. The Fed plans to begin the gradual unwinding process in October and also announced that it plans to trim the assets by $10 billion each month. Fed also stated that this rate would be increased further by another $10 billion every three months to gradually reach a maximum of $50 billion a month.
Such assets consist primarily of Treasurys and mortgage-backed securities, which the Fed accumulated in the wake of the 2008 financial crisis under its quantitative easing program. This was done in a bid to keep the mortgage rates low and provide liquidity to the economy.
Fed Indicates a Possible Rate Hike in December
The Fed kept the interest- rates unchanged as expected. Currently pegged at 1% to 1.25%, the central bank announced that it expects to hike the interest rate to 1.4% by the year end. Moreover, it maintained its initial forecast for 2018, expecting to hike the benchmark interest rate to 2.1%. However, the Fed decreased its outlook for 2019 from its initial forecast in June. The Fed stated that it anticipates the interest rate to hover around 2.7% by the end of 2019, lower than the initial forecast of 2.9%.
The Fed’s interest rate projections, known as the dot-plot, indicated that there might be one rate hike in December, three more in 2018 and two further rate hikes in 2019. The CME FedWatch now estimated the possibility of a rate hike in December to 70%.
Such hawkish statements from the Fed led to a surge in the 10-year Treasury yield by 2.3%. The 2-year Treasury note yield surged 1.5% — its highest level since November 2008. This boosted the financial shares and boded well for banks. The SPDR S&P Bank ETF (KBE) rose 1.2% to 43.25 and the Financial Select Sector SPDR ETF (XLF) surged almost 0.6%. Shares of banks also rose following Fed’s announcement. Shares Goldman Sachs (GS - Free Report) , JPMorgan (JPM - Free Report) , PNC Financial Services (PNC - Free Report) , Bank of America (BAC - Free Report) and Citibank (C - Free Report) all gained 0.4%, 0.7%, 1.3%, 0.8% and 0.4% respectively.
Existing Home Sales Hit Its Worst Level in 12 months
Existing home sales for the month of August came in at 5.35 million, lower than the consensus estimate of 5.46 million and hit its worst level in the last 12 months. This figure is also lower than 5.44 million units for the month of July.
Existing home sales has dropped for the fourth time in the last five months and economists commented that this was because of a paucity of available homes that can be bought.
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