Stocks surge, Powell says rates 'just below' neutral
Stocks jumped after Federal Reserve Chairman Jerome Powell said interest rates are “just below” neutral, or at a level that neither stimulates nor cools economic growth. The statement follows more than a month of market turmoil after Powell commented that the central bank was “a long way” from reaching neutral for interest rates.
“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy,” Powell said during a speech in New York on Wednesday.
The S&P 500 (^GSPC) rose 2.3%, or 61.61 points, by the end of trading Wednesday, with the tech sector leading advances. The Dow (^DJI) rose 2.5%, or 617.7 points, representing the best one-day advance since March. Both the S&P 500 and the Dow are up in November as of market close. The tech-heavy Nasdaq (^IXIC) rose nearly 3%, or 208.89 points.
Equities began their sharp advances Wednesday afternoon shortly following Powell’s comments. Market participants were looking for signs from Powell that the central bank might consider changing its current forecast for at least three interest rate hikes over the next year. The Fed has been gradually removing its accommodative monetary policy since December 2015, pushing up historically low interest rates as the U.S. economy picked up. Investors largely expect that the Federal Open Market Committee (FOMC) will raise its benchmark interest a quarter point in December, marking the fourth rate hike this year. The FOMC last raised rates in September to the current target range of between 2% and 2.25%.
On Tuesday, Fed Vice Chairman Richard Clarida delivered a speech in which he backed gradual rate hikes and added that there are “a range of views” among policymakers about where the neutral rate lies. However, he noted that interest rates were “much closer” to neutral than they had been three years ago. Powell’s deputy also gave an upbeat outlook on the U.S. economy, saying it has shown “strong growth” and that the job market has been “surprising on the upside for nearly two years.”
The Fed’s rate hike increases throughout 2018 sparked ire from President Donald Trump, who launched a fresh attack on Powell in an interview published Tuesday in The Washington Post. Trump blamed Powell for a slew of recent events including the stock market’s volatility and General Motors’s decision to close U.S. plants and cut jobs. Trump, who nominated Powell for Fed Chair just over a year ago, said in the interview, “So far, I’m not even a little bit happy with my selection of Jay.” Trump has been criticizing Powell for months, commenting that the Fed has “gone crazy” for continuing to raise rates and saying that the Fed should instead do “what’s good for the country.”
STOCKS: Salesforce beats expectations, JP Morgan upgrades Spirit Airlines
Shares of Tiffany & Co (TIF) slumped after the jeweler reported weak profit, same-store sales and lower tourist spending heading into the holiday season. Profit fell 5% over last year to $94.9 million, or 77 cents per share, below estimates of 78 cents per share. Same-store sales rose 3% in the third quarter on a constant currency basis, missing consensus estimates for a 5.6% advance. Net sales totaled $1.01 billion, falling short of consensus expectations of $1.05 billion. The company noted that spending attributed to foreign tourists, especially from China, fell in the quarter. Shares of Tiffany fell 11.86% to $92.50 each as of market close.
Salesforce (CRM) reported third-quarter results that beat analysts’ consensus expectations for earnings and revenue. The cloud software company delivered adjusted earnings of 61 cents per share, beating estimates of 50 cents. Revenue also exceeded expectations, coming in at $3.39 billion versus expectations of $3.37 billion. Billings, which help track sales productivity, grew 27% in the quarter to $2.89 billion, while analysts were expecting $2.68 billion. Salesforce also said it expects adjusted earnings of between 54 cents and 55 cents per share on revenue of $3.55 billion to $3.56 billion, exceeding average analysts’ forecasts for 57 cents per share on revenue of $3.52 billion. Shares of Salesforce climbed 10.24% to $140.60 each as of market close.
JP Morgan analyst Jamie Baker upgraded Spirit Airlines (SAVE) to Overweight from Neutral and raised the stock’s price target to $82 from $59, implying about 40% upside. He estimates that Spirit will earn between $6.80 and $8.60 per share in 2019 and between $7.85 and $9.90 per share in 2020, above consensus EPS estimates for $5.11 in 2019 and $6.09 in 2020, according to Bloomberg data. Spirit recently reported that it expects total revenue per available seat mile – a key metric for airline efficiency – to increase 11% over last year in the fourth quarter, outpacing earlier expectations for an increase of 6%.
“At worst, it’s a one-time anomaly with no forward implications whatsoever. At best, it represents a paradigm shift in Spirit’s revenue trajectory,” Baker wrote. “Thankfully, at current fuel, we believe both extremes provide sufficient upside potential to warrant an upgrade.”
Shares of Spirit rose 5.88% to $62.22 each as of market close, after closing higher by more than 15% Tuesday.
Shares of Wayfair (W) rose after the online home goods store reported a 58% increase in direct retail sales for the five days between Thanksgiving and Cyber Monday. This accelerated from a 53% year-over-year increase for the same five-day period in 2017 and a 52% increase in 2016. Colin Sebastian, senior research analyst with Baird Equity Research, said in a note Wednesday that this year’s sales gain points to “considerable upside potential for this quarter.” Last year’s direct sales increase during the five-day period resulted in fourth-quarter revenue growth of 48%, following a 40% increase in 2016, Sebastian noted. Shares of Wayfair climbed 14.45% to $104.84 each by the end of trading Wednesday.
Dick’s Sporting Goods (DKS) reported that it earned $37.8 million in the third quarter, or 39 cents per share, up from $36.9 million and 35 cents per share a year ago. Earnings beat consensus expectations of 26 cents per share. The company also raised its 2018 EPS guidance to between $31.5 and $3.25 per share from between $3.02 and $3.20 per share. Net sales, however, fell slightly short of Wall Street’s expectations, with sales coming in at $1.86 billion versus $1.88 billion expected. Shares of Dick’s Sporting Goods wobbled Wednesday but ended higher by 2.49% to $37.24 each as of market close.
ECONOMY: New home sales fell 8.9% in October
New home sales in the U.S. tumbled 8.9% month-over-month in October, the Commerce Department reported, falling well below consensus economist estimates of an increase of 4% for the month. The seasonally adjusted annual rate of sales came out to 544,000 in October, from 597,000 in September.
New home sales in the South fell by 26,000 in October, representing about half of the national decline.
“The impact of Hurricane Michael likely is part of the story though, again, these data are subject to revision,” Ian Shepherdson, chief economist of Pantheon Macroeconomics, said in an email. “Prices likely will rebound somewhat from their recent declines as sales recover through the late fall and winter, but inventory is up 17.5% y/y, and that’s a real drag.”
Homebuilders had an estimated 336,000 homes available to purchase at the end of October, a supply of 7.4 months based on the current sales rate. The median sales price for new homes in October declined 3.1% over last year to $309,700.
Third-quarter U.S. gross domestic product is forecast to rise 3.5%, according to the Commerce Department’s second estimate of quarterly GDP released Wednesday. This rate was unrevised from the previous estimate and registered in-line with consensus expectations. In the second quarter, GDP grew at a 4.2% rate.
The U.S. trade deficit widened to $77.2 billion in October, according to preliminary data from the Commerce Department released Wednesday. This was slightly larger than consensus expectations of a $77 billion deficit. Wholesale inventories rose 0.7%, outpacing consensus estimates of a 0.4% increase, while retail inventories also beat estimates and climbed 0.9%.
The widening trade deficit suggests “a drag on GDP from net exports,” Jim O’Sullivan, chief U.S. economist for High Frequency Economics, wrote in a note. “Conversely, however, inventories will probably add to growth again in Q4, boosted by at least some acceleration in imports ahead of threatened tariffs.”
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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