Stocks trade near record highs as investors digest Fed's latest move

Stocks trade near record highs as investors digest Fed's latest move

U.S. stocks rose slightly in early trading Thursday trading the Federal Reserve signaled it would be aggressive on tapering and sees three interest rate hikes in 2022.

The Dow Jones Industrial Average climbed 240 points. The S&P 500 was up 0.2% and on track for a record close. The Nasdaq Composite was down 0.6%.

Thursday’s moves came a day after stocks rallied in the previous session as the Federal Reserve announced a more aggressive plan to wind down its asset purchases and hike rates in 2022.

Shares of companies that have done well in previous rate-hiking cycles led early gainers on Thursday, with materials stock Freeport-McMoRan rose more than 3%. Bank stocks also rose across the board, with JPMorgan Chase, Citigroup and Bank of America all up about 1%.

“I think what the market was looking for more than anything was certainty … It got that yesterday. There was a lot of bearish sentiment that was building up in the market,” said Don Calgani of Mercer Advisors.

Some large tech stocks struggled, with Apple falling more than 2% and major semiconductor stocks like AMD and Nvidia dropping. Shares of Adobe and homebuilder Lennar fell in early trading after underwhelming quarterly reports.

In transportation news, Delta Air Lines reported that it now expects to see a profit of $200 million in the fourth quarter, after previously projecting a loss. Shares rose more than 1% on the news.

Following the Fed news, traders accelerated their own expectations for interest rate increases. Fed funds futures trading now points to a 63% chance of the first quarter-percentage-point increase coming in May 2022, with chances also rising to about 44% that the central bank could make its first move as soon as March, according to the CME FedWatch Tool.

The Fed will begin reducing the pace of its asset purchases in January and buy just $60 billion of bonds each month going forward, compared to $90 billion in the month of December. That decision follows recent inflation data showing a 6.8% surge in November, which is higher than expected and the fastest rate since 1982.

“The notion that elevated inflation levels would be transitory has finally been thrown out the window by the Fed and the latest policy adjustments are reflective of a committee that doesn’t want to miss the next train leaving the station,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

Additionally, Calgani said that the rise of omicron variant could serve as a “get out of jail free card” for Powell to move back to a more dovish stance if the economic recovery falters.

In other central banking news, the Bank of England announced it is hiking its key policy rate by 15 basis points to 0.25%. The European Central Bank also announced a plan to slow its emergency asset purchases.

On the economic data front, weekly jobless claims came in slightly higher than expected, while housing starts for November were much stronger than economists projected after declining in the prior month.