The stock market closed slightly lower on Friday, as inflation rose and Janet Yellen said the Federal Reserve will raise interest rates gradually this year. The Dow fell 54, or 0.3%, to 18,232. The Nasdaq lost a point, to 5,089, while the S&P 500 lost 5, or 0.2%, to 2,126. Declining issues outnumbered advancers by a more than 3-to-2 ratio on the NYSE, where volume was light heading into the holiday weekend.
Traders think that investors concluded that evidence of a pick-up in inflation suggests the Fed is likely to raise rates in September or December. As one trader explained, “The reported inflation figure was 1%, as expected, while the core rate, which strips out food and energy, rose 3%. The fastest rate in over a year. While Chicago Fed President Charles Evans received a lot of attention for his dovish views recently, Janet Yellen and Bill Dudley favor raising rates this year. The somewhat elevated core rate of inflation provided support to members of the Federal Reserve Board, who believe it necessary to raise rates this year. Aware of this, many investors probably decided to cash in some of their gains on Friday.”
Bulls were hoping that Janet Yellen might provide investors with some positive and reassuring comments as we headed into the Memorial Day Weekend. However, as positive and reassuring as she was, it was not enough to push the major indices higher. A late-day fade, following Janet’s comments, left stocks slightly lower for the day. The overall week ended mixed, though, with the Dow off 0.2%, the Nasdaq up 0.8% and the S&P 500 up 0.2%. We are still near all-time highs, so it was really not all that bad of a week.
Bulls knew that Janet Yellen was not about to deliver a resounding “thumbs up” for the stock market, and given her past comments about an overvalued stock market, her Friday comments were not that surprising. Her market comments last year about biotech and social media looking expensive also came to mind ahead of Friday’s speech. At least there was not a big letdown after her “less-than-bullish” speech. It still would have been more exciting to have had stocks rally into the close on Friday, but that was not to be the case.
Yellen was under a lot of pressure with this speech, and she did an adequate job in “explaining away” the recent worries about the dreadful first quarter GDP growth rate of 0.2%. She said we had been experiencing “transitory” effects, and she mentioned bad weather, as well as West Coast labor disputes at major ports. While winter storms and port labor disputes might explain some of the first quarter slowdown, those events do not completely explain the ongoing weakness we are seeing across the board in terms of economic numbers.
There were even some financial news reports on Friday that the government was moving toward a “re-jiggering” of how it computes GDP. This was a jaw-dropper for most of the crowd that is generally cynical about government numbers to begin with, and the mere thought that we might see a big restatement of first-quarter GDP (and better numbers in the future) was enough to worry investors across the board. It might explain some of Friday’s reluctance on the part of the stock market to head higher into the long weekend.
Yellen’s remarks were quite unremarkable, but the general takeaway was that the Fed still wants to raise rates this year. The recent buzz among Fed watches has been that the Fed had become more “data driven,” and that the “data” would drive their decisions in the future. The panic-driven Fed of the past that bailed out the economy (and markets) in the aftermath of the Lehman collapse and housing meltdown was supposed to become a thing of the past. Well, critics of the Fed were quick to note that if the “data” is not there to give a green light to rate interest hikes, then you just have to change how that data is calculated.
Rejiggering data seems like a bad way to run an economy and a bad way to make Fed decisions, but that was the vibe on Friday. Yellen did not upset the apple cart, but she did not exactly provide the reassuring words that bulls were hoping to hear in her speech. It was almost as if she said that the Fed would raise rates sooner rather than later, but that was based on the Fed’s optimism that the economy would continue to grow, and that future positive economic data would be there to support a 2015 rate hike.
Alan Greenspan recently warned of a “taper tantrum” that would kick in once the Fed does finally raise rates, and that will likely become the theme of this summer. Stocks and bonds never react well to any sort of rate hike, and yet, Janet Yellen mentioned and emphasized the need to “normalize” interest rates. This conundrum of normalization versus a buoyant stock market is what had investors thinking long and deep as stocks headed lower into the close on Friday. Yellen’s Friday speech may have avoided creating any sort of panic in the market, but it clearly did leave a 2015 rate hike on the table.
We are, however, still seeing the major indices hold tight near their recent highs, and a flat and mixed week for the stock market was still an encouraging way to close out the week and head into the long Memorial Day Weekend. That said, the Gorilla wishes each and all a relaxing weekend. Remember to get the flags out and remember the brave men and women who gave their lives for this great country. We will be back in action on Tuesday, so again, have a great weekend!
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