Power Goes Out on S&P 500 Rally as China Crashes Fed Celebration

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  • The S&P 500 flirts with 2,000 before rate hold drops stocks
  • Utilities boosted, financials hit after the rate decision

Janet Yellen killed the week’s equity rally by bringing front and center the very things investors had hoped to get past: murkiness over the global economy and interest rates.

Volatility returned to stocks after a brief hiatus, snuffing out the biggest rally before a Federal Reserve decision since 2012, as the central bank delayed raising interest rates because of concerns about global growth and unstable financial markets.

“People had been hoping for clarity,” said Michael Block, chief equity strategist at Rhino Trading Partners LLC in New York. “We’re right back to where we started.”

S&P 500 was up 2.7% in five days before FOMC

The Standard & Poor’s 500 Index jumped 2.7 percent in the five days before the Fed decision and on Thursday topped 2,000 on an intraday basis for the first time since Aug. 21. It didn’t stay there for long, as the Fed’s decision sparked a two-day rout of 1.9 percent that wiped out the index’s gain for the week. It closed at 1,958.03, in line with its September average.

Yellen, the Fed chair, warned that economic and financial developments around the world may restrain economic activity in America and curb inflation. That redirected investor attention to the implications of a flagging Chinese economy, plunging commodity prices and a strong dollar -- the culprits of the August selloff that sent the S&P 500 into its first correction since 2011.

The late-week slump gave the S&P 500 another period of indecision, as it capped its 10th straight week of back-and-forth results with a decline of 0.2 percent. The gauge had shown signs of stabilizing before the Fed decision, as daily swings calmed amid speculation China had succeeded in halting a selloff in its equities.

After enduring its biggest weekly gain on record in August, the Chicago Board Options Volatility Index had tumbled 25 percent in September leading up to the gathering. The VIX ended Friday above 20 for the 20th straight session, the longest stretch since June 2012.

The Fed decision stopped in their tracks traders trying to revive a favorite options trade. On the brink of posting its biggest three-day gain ever, the VelocityShares Daily Inverse VIX Short-Term exchange-traded note, a security designed to rise as equity market turbulence dissipates, plunged almost 10 percent in the final hours of Thursday’s session. It fell another 12 percent Friday.

It was also bad news for a significant constituency of traders who hoped Yellen and her colleagues would get the first rate increase over with as a way of affirming faith in the U.S. economy, amid momentum seen in everything from American gross domestic product to retail sales.

“I was hoping we could start focusing on market fundamentals,” said Kevin Mahn, president of Parsippany, New Jersey-based Hennion & Walsh Asset Management Inc. “Now for the next three months, we will be talking about what the Fed will do next.”

Stocks that benefit in a low-rate environment got a boost, while financial shares were punished. Banks and insurancestocks declined 3.2 percent in the final two days of the week after rallying before the Fed gathering. The sector’s biggest decliners included Charles Schwab Corp., Genworth Financial Inc. and Fifth Third Bancorp. All slipped more than 4.3 percent.

Utilities, a group that until recently seemed to be signaling investors were bracing for a rate hike, rallied 2.5 percent for the week as all but four of the group’s 29 companies rose.

Shares of high-dividend-yielding companies also gained. The iShares Select Dividend exchange-traded fund touched a four-week high en route to a 0.8 percent weekly advance.

While stocks with high payouts may be tempting with rates pinned near zero, you’re better off looking elsewhere, according to Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s Global Markets Institute.

Investors should be betting on blue-chip companies that have plenty of potential to boost cash flow and return on equity, Cohen said in an interview with Bloomberg’s Tom Keene. Focusing on those that return the most money to shareholders is too narrow a plan, she said.

“It’s not just about dividend growth,” Cohen said. “You want to be investing in companies that generate cash and reinvest in their own companies, and have a strong ROE.”