The Federal Reserve raised its key interest rate for the first time in nearly a decade. This assured investors that the U.S. economy is resilient enough to bear the future increase in borrowing costs. However, the hike in the federal funds rate was subdued since the Fed emphasized a gradual path of rate increases.
Nevertheless, the highly anticipated move indicated the Fed’s confidence in the U.S. economy and extended benchmarks gains for the third straight session on Wednesday. Yesterday’s rally was also a reprieve for investors as they navigated sharp swings in oil prices and the junk-bond market. Overall, Wednesday’s gains were broad based, with 11 out of the 12 sectors of the S&P 500 ending in the green.
Fed’s Confidence in the U.S. Economy
The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50% as policy makers unanimously voted in favor of a rate hike. This raise in the benchmark rate for the first time in almost a decade ended what Fed Chairwoman Janet Yellen called an “extraordinary period.” During this period, ultra-low interest rates aided economic recovery, lending a bull run to the markets.
The Fed believes that the U.S. economy will continue to do well and a slight increase in rate is appropriate. In Yellen’s own words, “the Fed’s decision today reflects our confidence in the U.S. economy.”
Aside from pointing to the Fed’s firm faith in the labor market improvement, the move also indicates “solid” consumer spending, a rebound in the housing market and strong business fixed investment.
Separately, the policymakers forecast the rate to crawl up to 1.375% by the end of 2016. However, to soften the blow to an end of easy money, the Fed stressed that the pace of a rate hike will be "gradual" in nature.
Upbeat Labor Market
The U.S. economy created a total of 211,000 jobs in November, beating the consensus estimate of 199,000. Moreover, October’s job numbers were revised up from last month’s reported figure of 271,000 to 298,000. Hiring was also broad based in November, with the energy sector being the lone exception. November’s job gains have pushed up the average monthly jobs growth to 210,000 so far this year.
Separately, private sector employers added 217,000 jobs in November, higher than analysts’ expectations of 192,000 job additions, according to Automatic Data Processing, Inc. ADP. Mark Zandi, who prepares the report using ADP’s data, said that “job growth remains strong and steady.”
Moreover, the unemployment rate remained unchanged at 5% in November since a sizeable number of people began searching for work. The average hourly earnings gained 2.3% year on year in November and increased 2.6% from January through November, registering its strongest cumulative growth since 2009.
Positive GDP Report
Meanwhile, the Fed’s statement that the economy is recovering at a “moderate pace” is in sync with the slight improvement witnessed in the third quarter. The U.S. Department of Commerce reported in its “second” estimate that the economy grew at a pace of 2.1% in the third quarter, compared to earlier projected growth rate of 1.5%. Also, the third-quarter growth rate came in higher than the consensus estimate of 2% growth.
An upward revision in business inventories emerged as the main reason for the expansion in the quarter. Business inventories were revised upward from $56.8 billion reported in “advance” estimate to $90.2 billion. Further, positive contribution from personal consumption expenditures, nonresidential fixed investment, state and local government spending, residential fixed investment and exports added to economic growth.
5 Biggest Winners from Fed Rate Hike
The Dow Jones Industrial Average (DJI) rallied on the back of the historic Fed rate hike. The Dow gained 224.18 points or 1.3% to close at 17,749.09 on Wednesday. Additionally, the Standard & Poor’s 500 advanced 1.5% to close at 2,073.07, while the tech-laden Nasdaq Composite Index closed at 5,071.13, increasing 0.4%.
Defensive stocks including utility stocks rallied the most in nine months on Wednesday, banking on the Fed’s signal that the rate hike was a tentative beginning to a “gradual” tightening cycle. Moreover, the Fed’s move to raise rates was widely telegraphed and most of its response has been priced in. Other defensive stocks including consumer staples and discretionary stocks gained since a rate hike indicates that the economy is improving, which should ideally boost consumer spending.
Additionally, banks and non-banking financial institutions including insurance companies, asset managers and brokerage firms benefited from the rate hike. Banks gain from a steep yield curve, while insurance firms must match up assets with their liabilities, so higher rates mean more investment income.
Meanwhile, shares of five companies from the services, financial, electric utilities and diversified utilities sectors turned out to be the biggest gainers on Wednesday, boosted by the liftoff. These companies were Townsquare Media, Inc. TSQ, Resource Capital Corp. RSO, NRG Yield, Inc. NYLD, Pattern Energy Group Inc. PEGI and Swift Transportation Company SWFT, which soared 13.9%, 12.5%, 12.2%, 11.9% and 11.6%, respectively.
Semiconductor stocks were also among the gainers on Wednesday. However, these stocks got a boost from the Tax-Credit extension. Shares of SolarCity Corp. SCTY and Sunrun Inc. RUN skyrocketed 34.1% and 22.6%, respectively. Separately, biotech firms also surged after the FDA lifted trail restrictions.
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