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Stocks Tumble To Lowest Levels In Over A Year After Rate Hike - U.S. Commentary


Stocks saw typically post-Federal Reserve decision volatility in afternoon trading on Wednesday before ending the session sharply lower. With the steep drop late in the day, the major averages finished the session at their lowest closing levels in over a year.

The major averages climbed off their lows of the session going into the close but remained firmly negative. The Dow tumbled 351.98 points or 1.5 percent to 23,323.66, the Nasdaq plummeted 147.08 points or 2.2 percent to 6,636.83 and the S&P 500 slumped 39.20 points or 1.5 percent to 2,506.96.

The late-day sell-off on Wall Street came after the Federal Reserve announced its widely expected decision to raise interest rates by a quarter point.

While the Fed also forecast fewer than previously estimated rate hikes next year, the central bank's tone was not as dovish as some traders had hoped.

The central bank said its Federal Open Market Committee decided to raise the target range for the federal funds rate by 25 basis points to 2.25 percent to 2.50 percent.

The closely watched accompanying statement noted the labor market has continued to strengthen and that economic activity has been rising at a strong rate.

Annual rates of both overall inflation and core inflation were also said to remain near the Fed's 2 percent target, with indicators of longer-term inflation expectations also little changed.

The Fed also reiterated that further gradual increases in interest rates would be consistent with the FOMC's mandate to foster maximum employment and price stability.

However, eagle-eyed Fed watchers noticed the inclusion of the word "some" in the statement regarding further gradual rate increases.

In another indication the Fed plans to raise rates less than previously anticipated, the central bank's projections point to two rate hikes in 2019 compared to the previous forecast for three.

The Fed's median projection for the federal funds rate in 2019 was reduced to 2.9 percent from the 3.1 percent expected in September.

The median forecasts for rates in both 2020 and 2021 were also lowered to 3.1 percent from 3.4 percent, while the projection for longer run rates was downwardly revised to 2.8 percent from 3.0 percent.

The central bank also lowered its forecasts for real GDP growth in 2018 and 2019 to 3.0 percent and 2.3 percent, respectively. The Fed previously projected 3.1 percent growth in 2018 and 2.5 percent growth in 2019.

While once again calling risks to the economic outlook roughly balanced, the Fed added that it will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

Following today's rate increase, Fed Chairman Jerome Powell said rates are closer to what the central bank views as a neutral level that is neither restrictive nor stimulative.

"Where we are right now is the lower end of neutral," Powell said in his post-meeting press conference. "There are implications for that."

Paul Ashworth, Chief U.S. Economist at Capital Economics, said today's widely anticipated rate hike was tempered by the slight downward revision to Fed officials' projections for additional rate increases in 2019 and beyond.

"Still, with the vote unanimous and the median rate projection for end-2019 revised down by only 20bp, this is hardly the 'dovish hike' that some were anticipating," Ashworth said.

"On balance, we still expect the Fed to hike twice in the first half of next year before a slowdown in GDP growth to below potential forces it to the side lines," he added. "We then expect the Fed to reverse course and cut rates by 75bp in 2020.

The announcement from the Fed overshadowed a report from the National Association of Realtors released unexpectedly showing a significant increase in existing home sales in November.

NAR said existing home sales surged up by 1.9 percent to an annual rate of 5.32 million in November after jumping by 1.4 percent to a rate of 5.22 million in October. Economists had expected existing home sales to drop by 0.6 percent.

Despite the second consecutive monthly increase, existing home sales in November were down by 7.0 percent compared to the same month a year ago.

Sector News

Gold stocks moved sharply lower over the course of the session after initially moving to the upside. After reaching its best intraday level in over four months, the NYSE Arca Gold Bugs Index plunged by 5.8 percent.

The sharp pullback by gold stocks came as the price of the precious metal came under pressure in electronic trading following the Fed announcement.

Substantial weakness also emerged among semiconductor stocks, as reflected by the 4.2 percent nosedive by the Philadelphia Semiconductor Index. The index tumbled to its lowest closing level in over a year.

Chip maker Micron (MU) posted a steep loss after reporting weaker than expected fiscal first quarter revenues and providing disappointing guidance.

Oil service, transportation, and computer hardware stocks also saw significant weakness, moving lower along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Wednesday. Japan's Nikkei 225 Index slid by 0.6 percent, while Hong Kong's Hang Seng Index edged up by 0.2 percent.

Meanwhile, the major European markets all moved to the upside on the day. While the U.K.'s FTSE 100 Index jumped by 1 percent, the French CAC 40 Index climbed by 0.5 percent and the German DAX Index rose by 0.2 percent.

In the bond market, treasuries showed a lack of direction for much of the session before moving notably higher on the heels of the Fed announcement. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, slid 4.7 basis points to 2.778 percent.

Looking Ahead

Reaction to the Fed announcement may continue to impact trading on Thursday along with reports on weekly jobless claims, leading economic indicators, and Philadelphia-area manufacturing activity.

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