Stocks fall after Fed hints it may be more aggressive at removing stimulus

The 10-year Treasury yield hit its high of the day and the S&P 500 hit its low of the session following the Federal Reserve’s release of the minutes of its December meeting. The meeting minutes showed the Fed discussing reducing its balance sheet shortly after it raises rates later this year. 

The blue-chip Dow Jones Industrial Average fell 99 points, or 0.2%. The S&P 500 lost 0.8% and the tech-heavy Nasdaq fell 1.9%.

The Fed is tapering its bond purchases now and has already indicated to the market that it will raise rates soon after it finishes that taper in March. But the market is awaiting indications from the Fed on what it would do with its nearly $9 trillion balance sheet once it’s done increasing it. The minutes show officials considering to shrink the balance sheet along with raising rates as another way to remove policy accommodation.

“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the meeting summary stated.

Salesforce dropped 5.6% Wednesday following a downgrade from UBS. UBS also cut Adobe, sending its shares down 4.8%. Both were among the top decliners in the S&P 500. Adobe dragged down the Nasdaq too, along with cloud company Okta, which fell 3.7%. Chipmakers Nvidia and Advanced Micro Devices as well as Google parent Alphabet were each down about 2%.

Stocks linked to the reopening helped push the Dow higher Wednesday. Honeywell and Freeport-McMoRan both rose about 2%. Boeing, Caterpillar and General Electric added about 1% each. Bank of America gave an upgrade to Pfizer, noting that the company’s profits from Covid treatments provide upside for the stock. Pfizer’s shares moved 2.3% higher.

These moves came as Treasury yields have surged to start the year. On Tuesday, the benchmark 10-year yield reached 1.71%, its highest level since November.

“You’ve seen a move of people rotating from tech, high-growth and momentum stocks to value, cyclical and income stocks,” Infrastructure Capital Management CEO Jay Hatfield said. “It’s the liquidity that’s driving this, not the interest rate, necessarily. When there’s liquidity you go for momentum because the Fed is forcing stocks and bonds to rally. If the Fed is going to pull that liquidity out, you say I want to be in what’s the cheapest, the lowest risk.”

The Federal Reserve said last month it will unwind its monthly bond-buying program at a faster pace, as the central bank tries to grapple with a surge in U.S. inflation.

“U.S. stocks are struggling for direction,” Oanda senior market analyst Edward Moya said. “The first half of the year will be all about a strong U.S. growth outlook that should benefit cyclical stocks, but a sustained pullback with tech stocks is not justified given the Fed hasn’t officially started their interest rate hiking cycle.”

ADP reported Wednesday that private job growth totaled 807,000 in December, more than double the Dow Jones estimate of 375,000. The data in the report covers only through the middle of December, however, which was before the height of the escalation in Covid cases and concerns.

Investors looking for clues on where the economy stands heading into the new year also awaited Friday’s more closely watched nonfarm payrolls count, which is expected to show a gain of 422,000.

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