Stock Traders ‘Sell the News’ After Fed Goes Big: Markets Wrap

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(Bloomberg) -- A rally that briefly drove stocks to their all-time highs bumped into a wall as the Federal Reserve signaled it’s not in a rush to ease policy after cutting rates by a half-point.

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The S&P 500 wiped out a gain of 1% as Jerome Powell cautioned against assuming big rate cuts would continue. While that’s not necessarily bad given that aggressive easing is usually associated with economic stress, traders ended up pushing equities near session lows at the 4 p.m. New York close.

“After a rally ahead of today’s Fed announcement, it wouldn’t be unreasonable for the market to pull back a bit,” said Bret Kenwell at eToro. “However, the long-term outlook remains promising. So long as the economy holds up and inflation doesn’t roar back to life, lower rates and strong earnings growth can continue to drive stocks higher over the long term.”

To Ian Lyngen and Vail Hartman at BMO Capital Markets, Powell’s press conference was consistent with the magnitude of the cut and effectively communicated that officials aren’t particularly worried about any aspect of the real economy at the moment.

“It’s impressive that in the classic, ‘buy-the-rumor, sell-the-fact’ dynamic, the ‘fact’ of a 50 basis-point cut was still met by selling,” they said, referring to the reversal in bonds. “Positions are being squared and the market is moving back into the mode of trading the incoming economic data with an eye to the potential influence from the presidential race.”

The S&P 500 fell 0.3%. The Nasdaq 100 dropped 0.5%. The Dow Jones Industrial Average lost 0.2%. A gauge of the “Magnificent Seven” megacaps slid 0.1%. The Russell 2000 of small firms was little changed.

Treasury 10-year yields advanced six basis points to 3.7%. The dollar rose.

Markets may temporarily encounter the “buy the rumor, sell the news” phenomenon, according to Florian Ielpo at Lombard Odier Investment Managers. That said, traders will need to remember how the Fed has transitioned from being a headwind to a tailwind, he added.

“While most of its potential actions may have been priced in by the bond market, the benefits of easing are difficult to gauge, and the equity (and credit) market could very well underestimate them,” Ielpo said. “The benefits of these cuts will depend heavily on the growth scenario: rising equities if there is no recession, but declining if growth fails to meet expectations.”