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US stock market investors have put December 14 firmly in their crosshairs.
Amid a range of reports showing the US economy can withstand an interest-rate increase, investors are punishing industries likely to suffer with tighter monetary policy and shifting cash into groups that benefit from higher borrowing costs and economic growth.
The S&P 500 Index tumbled 0.7 per cent to 2,153.74 in the five days, its worst decline since the week ended September 9. The Dow Jones Industrial Average fell 0.4 per cent to 18,240.49.
Shares of real estate companies slumped 5.3 per cent for their biggest selloff in more than three years, while phone and utilities stocks, coveted for their high dividend payouts, dropped at least 3.8 per cent as Treasury yields advanced. On the flip side, financial stocks gained 1.5 per cent as Citigroup and Goldman Sachs both rose at least 4.3 per cent.
"We're seeing a continued churn in leadership within the market," Craig Sterling, head of US equity research at Boston-based Pioneer Investment Management, said in an interview Friday in New York. "It's obvious the market is starting to price in a December rate hike - it would be kind-of surprised if that didn't happen."
Odds of a rate hike at the Fed's December 14 meeting climbed to 64 per cent on Friday from 59 per cent a week earlier. That's the highest since early June, when a sluggish jobs report derailed the market's expectations for tightening. The odds of the Fed increasing rates at its next meeting on November 2 stand at 17 per cent, compared with 40 per cent at the beginning of September.
Investors need to be wary of accepting a December 14 rate hike as a fait accompli. With a presidential election next month and two more jobs reports to come, nothing can be taken for granted.
Still, the numbers are shaping up for the Fed to act before the end of the year. The most-recent figures on the US labour market, which were released Friday, showed hiring expanded by 156,000 in September, less than the 172,000 median forecast of economists, while the August number was revised higher. Although the September growth was less than expected, it wasn't seen as enough to derail the Fed, particularly since other reports earlier in the week signaled economic strength with manufacturing activity improving and car sales stronger than analysts' estimates.
"The Fed would be quite happy if we had these type of jobs numbers for November and December," said Joe "JJ" Kinahan, chief strategist at TD Ameritrade Holding. "From a credibility point of view, they're dying to raise rates and the only thing that kills them is bad employment reports. Employment reports that are basically unchanged? They'll take them all day long in my opinion."
Even so, the latest report didn't wholly remove a persistent sense of ambiguity of what it means for the market, Kinahan and Sterling agreed. The measure of market turbulence known as the VIX rose for a second straight week, climbing 5 per cent Friday to close at 13.48.
"We expected volatility to pick up and it hasn't happened - the markets really across the board have been much more well-behaved than we were expecting," said Matthew Freund, a portfolio manager at USAA Asset Management in San Antonio, Texas. But that could change as the election gets closer, he added. In addition, seasonal trends could have an impact because October has historically delivered the most swings of 1 per cent or more going back to 2000.
To add even more uncertainty, central bankers continue to weigh in with often disparate takes on the state of the economy.
In a speech on Friday, Fed Vice Chairman Stanley Fischer likened the latest jobs report to a "Goldilocks" one and said hiring was continuing at a pace "fully consistent" with lower unemployment, but continued to contrast with a weak overall economic expansion. Meanwhile, Cleveland Fed President Loretta Mester said a rate hike is appropriate and that "all meetings are on the table."
The central bank's promise of transparency has resulted in some mixed messages to the market during the past year, Freund said. And with that in mind, investors shouldn't be too confident that a rate hike is definitively on the table before the end of the year, Sterling said.
"The Fed can always come up with an excuse to do whatever they want," he said.
