Staying the Course

U.S. markets close mixed as the Federal Reserve maintains interest rates and pledges continued support.

Read in Browser   The Market Sum | Insight after the bell By Caleb Silver, Editor in Chief Wednesday, September 16, 2020 Headlines 1. US markets close mixed following FOMC decisions 2. The Fed holds rates and pledges continued support 3. Mortgage-backed securities are back, big time 4. SNOW blows higher, minting Buffett nearly $1 billion Markets Closed Dow 28,032.38 +36.78 (+0.13%) S&P 3,385.49 −15.71 (-0.46%) Nasdaq 11,050.47 −139.86 (-1.25%) VIX 26.15 +0.56 (+2.19%) Bitcoin 11,015.23 +219.70 (+2.04%) US 10-Yr Yield 0.687 +0.008 (+1.18%)     Image courtesy GettyImages/John Lund Markets Today U.S. markets were all over the place today as investors were waiting for a signal from the Federal Reserve on the future direction of interest rates and the extent of its continued support for the economy. They heard both, and the short answers are that interest rates will be down for several years, and its support will continue as long as necessary. The long answers are below.   At the close, the DJIA rose slightly, while the S&P 500 and the Nasdaq lost ground, dragged down by shares of Microsoft (MSFT) and Apple (AAPL). One tech stock that did rise, and that's an understatement, was Snowflake (SNOW), the database software company that debuted on the NYSE today. It made history becoming the largest software IPO in history. That's saying something. PODCAST ALERT! The latest episode of The Investopedia Express is LIVE. On this week's podcast: Why the markets will remain under pressure Why American tech giants are cozying up to India's Reliance Industries A few good minutes with Schwab's Liz Ann Sonders Why you need to know about Quadruple Witching Day Sign up below or wherever you get your audio podcasts and please give it a listen. We'd love you to rate and recommend it if you think it is worthy. Headlines: The U.S. government plans to begin shipping the first COVID-19 vaccine within 24 hours after regulators authorize its use, federal health officials said. Shipments of the first vaccine cleared for use would start soon after the U.S. Food and Drug Administration issued the OK, according to plans that federal health officials released Wednesday. China's ByteDance Ltd. would retain a majority ownership stake in its U.S. TikTok app unit as part of a proposal being reviewed by national security regulators, according to the WSJ. The Committee on Foreign Investment in the U.S., known as Cfius, which includes officials from the Treasury, State, Commerce, and other departments, reviewed the deal late Tuesday afternoon. Bloomberg reported that Oracle will get full access to TikTok's source code and updates as part of the deal to ensure user data is not being shared with the Chinese government. The Federal Trade Commission is preparing to file a possible antitrust lawsuit against Facebook by year-end, according to the WSJ, in a case that would challenge the company's dominant position in social media. The FTC has spent more than a year investigating concerns that Facebook has been using its powerful market position to stifle competition. The U.S. Justice Department has joined U.S. securities regulators in examining allegations that electric truck startup Nikola misled investors by making exaggerated claims about its technology, according to multiple reports. Specifically, federal prosecutors are probing allegations that Nikola, a maker of electric and hydrogen-powered semi-trucks that listed publicly in June, misrepresented progress it made in developing key technology core to releasing new models. Eli Lilly said it has found proof of concept data from an interim analysis of a clinical trial that showed a reduced rate of hospitalization for coronavirus patients treated with its neutralizing antibody drug. The U.S. drugmaker said the experimental treatment had helped patients recently diagnosed with mild-to-moderate symptoms of COVID-19 rid their systems of the virus sooner, potentially preventing them from hospitalization. The U.S. House Committee on Transportation and Infrastructure issued a 238-page report on Boeing that accused the plane manufacturer of prioritizing profits over safety and detailed "disturbing cultural issues" as the company raced to finish the 737 Max jet to compete with rival Airbus. The report comes as regulators are in the final stretch of work to re-certify the planes. The 737 Max has been grounded worldwide since March 2019, following the second of the planes' two fatal crashes. In its latest economic outlook, the OECD said the world economy will contract by 4.5% this year—an upward revision from an estimate made in June that pointed to a 6% fall in gross domestic product. Going forward, the OECD expects the global economy to grow by 5% in 2021. However, the outlook "remains exceptionally uncertain" due to the coronavirus pandemic, the organization said.     Photo courtesy FederalReserve Fed Stays the Course ... and it Will be a Long Journey As expected, the Federal Open Market Committee (FOMC) of the Federal Reserve kept interest rates near zero and clearly indicated that the overnight rate could stay near zero through 2023. We knew they weren't going anywhere for awhile, and now we have a better idea of that time horizon. Stubbornly high unemployment and stubbornly low inflation have forced the central bank's hand, and it has been very transparent about it. The FOMC also pledged to keep buying government and corporate bonds to the monthly tune of around $80 billion, in addition to various other stimulus measures.   The chart above—which is the worst in finance—shows the FOMC's so-called Dot Plot, which indicates where the members of the committee think interest rates will be for the next few years. Connecting the dots tells us that interest rates returning to the 2–4% range is not something we will see for a very long time.   The Impact of Low Rates + Low Inflation  Low interest rates and low inflation have been a good recipe for stock markets dominated with growth companies that like to borrow heavily. We know a few of those. They can also be good for borrowers like homebuyers or homeowners looking to refinance.   Mortgage Backed Securities are Back with a Bang If you hadn't noticed, refinancing activity and home buying in the U.S. has been red hot, and Wall Street is packaging those loans up and selling them to very willing buyers. The value of single-family mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac totaled almost $322 billion in August, a new monthly record, according to Inside Mortgage Finance. Incidentally, the Fed has been buying tens of billions of dollars worth of those mortgage-backed securities in just one of the many monetary policy programs it has introduced this year. It doesn't want a repeat of the 2008–09 housing crisis.    FOMC Sees GDP Growth, Just Not that Fast While the FOMC did see some near-term improvement to its GDP forecasts, the committee says 2022 might be weaker than expected. It now sees a full-year GDP decline of 3.7%, considerably better than the 6.5% drop forecast in June. However, it lowered its 2021 outlook to 4% from 5% and 2022 to 3% from 3.5%. The committee expects 2.5% GDP growth in 2023, so you can forget all about that V-shaped recovery.     Snowing in the Cloud Sometimes a company entering the public markets finds the right moment, and Snowflake, the software database company, did that today, making history as the largest ever software IPO. Shares surged more than 119% in its market debut on the New York Stock Exchange. No bell-ringing on Wall Street, but the company's shares blew through the investing world like a blizzard.   The stock began trading around 1:00 p.m. at $245 per share, before being briefly halted due to volatility. Yesterday, Snowflake priced shares at $120, higher than the $100 to $110 range it estimated on Monday, and a huge bump from the $75 to $85 range it proposed last week. It was what we call, "oversubscribed."     Photo courtesy NYSE.com Valuation Soars At its opening price of $245, Snowflake was worth $67.94 billion, more than five times its $12.4 billion valuation in February.   The Highly Profitable Database Software Market If data is the oil of the 21st century, Snowflake is trying to carve out its own territory in making software for managing corporate data. This database market already generates $55 billion a year in sales. Snowflake produces database software that uses the same standard as Oracle but can be used in the cloud and scaled up or down as needed.    Steep Growth, but Mounting Losses Snowflake has experienced a flurry of revenue growth, but losses have also been accumulating. Revenue grew nearly 175% in the fiscal year that ended at the end of January, to $264.7 million from $96.7 million. In the first six months of this fiscal year, ending July 31, sales again more than doubled easily, moving to $242 million from $104 million. Losses grew to $348.5 million from $178 million in the same period. That's not outrageous for a software company, and clearly investors don't care.   So why is this man smiling?     Photo courtesy GettyImages/Alex Wong Berkshire's Bet on Snowflake Warren Buffett, who typically steers away from new technology companies, got in on the action. His Berkshire Hathaway invested more than $700 million in the firm through a separate private placement and by purchasing shares from a former chief executive.   At SNOW's high today, Berkshire's stake rose to about $1.7 billion from around $730 million based on the IPO pricing of $120 apiece. That's about a $960 million paper profit. More News: Top Coffee Stocks for Q4 2020 Top Oil and Gas Stocks for Q4 2020 The FANGification of Cannabis Stocks SPONSORED BY US Bank Your Finances, Your Way Planning ahead is the key to reaching your goals. These tips and tricks can help you manage your money and make smart financial decisions. Learn More  > (charts courtesy YCharts)     Shares of General Electric rose by over 11% after the technology company's CEO reported that cash flow is improving much faster than previously anticipated. Oil companies, including Occidental Petroleum, Diamondback Energy, and Valero Energy, are up today amid oil prices jumping 4% as inventories decreased due to Hurricane Sally shutting down several offshore production facilities.     Shares of Illumina fell by nearly 8.5% following reports that the biotechnology company is considering the acquisition of cancer testing startup Grail. NextEra's stock price fell by over 5% after the energy company announced an equity offering only one day after announcing a stock split and raised financial expectations. Word of the Day Oversubscribed Oversubscribed is a term used for when the demand for a new issue of securities, such as an IPO's shares, is greater than the number of securities offered. When a new issue is oversubscribed, underwriters or other financial entities offering the security can adjust the price upward or offer more securities to reflect the higher-than-anticipated demand.     Photo credit : GM History Today in History Sept. 16, 1908: William Crapo Durant, the nation's leading maker of wooden wagons and buggies, incorporated the General Motors Co. Durant knew that if GM succeeds, it will put his current industry out of business—and he goes ahead anyway. GM served as a holding company for the stock of Durant's Buick Motor Co., the biggest "motorcar" producer in the country—and would ultimately encompass dozens of other automakers and related companies. How can we improve the Market Sum? Tell us at marketsum@investopedia.com Enjoy the Market Sum? 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