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 Fed’s interest rates misfire.
Trade became more bumpy amid rising tensions between the West and Russia over its annexation of Ukraine’s Crimea region.
And Federal Reserve chair Janet Yellen added to the volatility by telling journalists 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 possibly early 2015 for a fed funds rate hike, 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.
But even after that, 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 per cent 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 per cent to 16,302.77.
And the Nasdaq Composite, hit by a one per cent loss on Friday, still managed to end the week with a 0.82 per cent 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.
But 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, she stressed, still depended on conditions.
“A rate hike is not necessarily bad for equity markets,” said Evariste Lefeuvre of Natixis. “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,” said Jack Ablin of BMO Private Bank.
“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 European Union and US boosting sanctions on Russia, targeting its economy.
Lefeuvre said the markets had decided for the moment that the tensions would remain in a “soft mode”, without escalating into a major conflict.
For the moment, he said, the threats being wielded “are not sufficiently credible to curb investor confidence”.
“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.”
Nicholas Colas, chief market strategist at ConvergEx Group, said, however, there were signs of edginess.
The floor for the CBOE VIX volatility index has nudged up, he noted, a sign of discomfort at the level stocks have been trading.
“In a normal stock market, increasing fear typically correlates with lower equity prices. We are not in a typical market,” Colas said.
But the signs are of expected higher volatility, which he said usually comes ahead of a fall rather than more gains.
“Equities bounced back nicely after Fed chair Yellen’s ‘six month’ sell-off, and the CBOE VIX index is still 14.5. Last year, it would have collapsed to 12-13.”
That, Colas said, pointed to more potential risk and reward in the markets.
“It may not be typical, but it’s going to be the norm.”
