NEW YORK, NY - AUGUST 09: A trader works on the floor of the New York Stock Exchange in morning trading on August 9, 2011 in New York City. Stocks opened higher following yesterday's 600 point drop. (Photo by Mario Tama/Getty Images)
Call it a tale of two trading sessions. On Monday, market momentum swung in just one direction: down.
Tuesday’s trading, by contrast, saw some wild swings. Before a key Federal Reserve meeting in Washington, the Dow Jones industrial average was up 243 points. It was down again substantially in mid-afternoon trading. But as the closing bell neared, the market proved feisty, seeming to absorb news from the Federal Reserve on interest rates. In the end it was the bears who hit the canvas, with the market closing up 429.92 for the session.
Nobody really knows what’s going to happen when the market opens this morning, but some positive signs did emerge. A new Reuters poll of Wall Street securities firms found that despite the Fed’s “hands off” policy following today’s meeting, 37% of respondents expect a new round of stimulus. That’s up 10% from a similar survey last week.
(MORE: As Market Seesaws, the Fed Sits on its Hands)
Also, data from InsiderScore, a firm that tracks traded by public company insiders, says that more have been buying than selling. (Insiders made $400 million in new purchases since July 1, mostly in the last two weeks.) This suggests that more positive corporate news may be on the way.
On top of that, we can find some clues about today’s market behavior in the key takeaways from Tuesday’s wild ride.
Same strategy from the Fed: The Federal Reserve rocked the markets after a mid-afternoon meeting, saying it would keep interest rates down “through mid-2013.”
At first, traders didn’t exactly appreciate the clarity. The Fed statement included an acknowledgment that the U.S. economy had been performing “considerably slower” than expected. (You can read the full Federal Reserve statement from today’s meeting here.) So it wasn’t hard for the market to read into the interest rate decision a lack of confidence in the short-term health of the U.S. economy. Stock prices quickly fell by about 150 points. The U.S. dollar and Treasury bond prices slid, as well, while gold charged even further ahead on the Fed statement.
But in the end, the realization by investors that at least a year of low interest rates remain seemed to win the day — and will likely carry over to tomorrow’s trading.
No QE3 on the horizon: On the negative side of the ledger for equities, traders see the Fed statement as a sign that there will be no “QE3;” that is, no more economic stimulus from Ben Bernanke’s office. That means any big economic policy changes will come from the White House or Congress – and few Wall Street professionals seem to have any confidence in that happening. Washington pols may have to enact some pro-growth policies going into an election year. As one CNBC wag put it, we’re staring at a “Japan-like malaise” unless U.S. economic policy shifts into job-creation and debt-reduction mode.
(MORE: Why Washington’s Hands Are Tied)
Treasury auction yields at all-time low: The 10-year Treasury benchmark sank to a bare-bones yield of 2.05% at around 3:15 in today’s session, before ending the day at 2.18%. That suggests buyers are still streaming into safe haven investments like bonds. On top of that, a key U.S. Treasury auction today that sold $32 billion in three-year notes earned a thin return for investors. Yields on the three-year filled in at 0.50%, a record low borrowing rate, according to the New York City-based research firm BTIG. Typically, as investors view the economy as weakening, they shed stocks from their portfolio and load up on bonds. That drives bond prices up and yields lower. Not a particularly good sign.
Gold keeps climbing: With extreme volatility in wide swaths of the financial markets, another traditional safe haven keeps climbing northward: gold. The yellow metal briefly crested $1,782 per-ounce before settling back to $1,747 later in the day. Wall Street types love ‘real assets” when the bullets start flying, and gold continues to be the hard asset of choice these days. Gold prices have more than doubled since 2007 – just before the economy tanked.
Did the stock market right itself yesterday? It’s too early to say, but what can be said is that at least we seem to be in a “glass half empty” stock market. That’s better than the drubbing investors took on Monday, when the glass barely had any water in it at all.