Still-cheap funds and signs of US economic strength after a lull kept Wall Street buyers cautiously in action this week, despite the Ukraine crisis and the US Federal Reserve’s interest rates misfire.
Trade became more bumpy amid rising tensions between the West and Russia over its annexation of the Crimean Peninsula. Fed Chair Janet Yellen added to the volatility by telling journalists that interest rates could begin rising “around six months” following the end of the quantitative easing stimulus program.
That sent stocks sinking on Wednesday as analysts calculated it meant a possible fed funds rate hike early next year, instead of the second half of the year as previously suspected.
It would be the first move in interest rates off the rock-bottom level since the end of 2008.
However, the Fed’s confidence in the economy — shown by its willingness to keep reducing the stimulus — and some better-than-expected economic indicators bolstered shares overall.
An end-of-week profit-taking surge, focused on tech stocks, failed to wipe out the week’s gains. Overall, the S&P 500 was up 1.38 percent for the period, ending at 1,866.52. On Friday, it hit an intraday record of 1,883.97 before pulling back.
The Dow Jones Industrial Average put on 1.48 percent to 16,302.77, and the NASDAQ, hit by a 1 percent loss on Friday, still managed to end the week with a 0.82 percent gain to 4,276.79.
Yellen’s gaffe, made in response to a journalist’s question following her first monetary policy meeting as chair, seemed to put the rate hike earlier than what the Federal Open Market Committee was itself forecasting.
However, it hardly changed the real picture the Fed is seeing in the economy, of weakness in the jobs market and no threat of inflation well into next year. Any rate action still depends on conditions., she said
“A rate hike is not necessarily bad for equity markets,” Evariste Lefeuvre of Natixis said. “If the rate increase reflects a fairly good expansion of economic activity ... stocks will benefit despite an increase.”
“Janet Yellen didn’t mean to say necessarily she was going to raise rates,” Jack Ablin of BMO Private Bank said. “I still believe that the Fed wants to keep interest rates as low as possible for as long as possible.”
Markets did not seem bothered by the Ukraine crisis, which saw both the EU and the US boosting sanctions on Russia, targeting its economy.
Lefeuvre said the markets have decided for the moment that the tensions will remain in a “soft mode,” without escalating into a major conflict.
For the moment, the threats being wielded “are not sufficiently credible to curb investor confidence,” he said.
“The most remarkable thing is the fact that investors are putting economic and job growth ahead of global political concerns,” Ablin said. “Economic matters are more important than government matters.”
However, ConvergEx Group chief market strategist Nicholas Colas said there were signs of edginess.
The floor for the CBOE VIX volatility index has nudged up, a sign of discomfort at the level stocks have been trading, he said.
“In a normal stock market, increasing fear typically correlates with lower equity prices. We are not in a typical market,” he said.
However, the signs are of expected higher volatility, which he said usually comes ahead of a fall rather than more gains.