MarketView for June 18

Summary

Stocks rallied sharply on Wednesday, with the S&P 500 ending at a record high, after the Federal Reserve hinted at a slightly faster pace of interest-rate increases starting next year but suggested rates in the long run would be lower than it had indicated previously.

The benchmark S&P 500 set intraday and closing record highs while the CBOE Volatility Index (VIX) fell to its lowest since February 2007. Wednesday's advance pushed the S&P 500 above its previous record closing high of 1,951.27, which was set on June 9.

The S&P 500 index has gained 1.1 percent for the week as investors largely shrugged off mounting tensions in Iraq and focused on a flurry of merger and acquisition activity as well as on better-than-anticipated manufacturing data.

The VIX slid 12 percent to close at 10.61, the lowest point for that index in more than seven years. Part of the decline was due to options contract expirations on Friday.

After a two-day policy meeting, the Fed reduced its forecast for economic growth to a range of between 2.1 percent and 2.3 percent from an earlier projection of around 2.9 percent. But the Fed's forecasts for 2015 and 2016 were unchanged, and it expressed confidence that the recovery was on track.

"Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace," Fed Chair Janet Yellen told a news conference. "The economy is continuing to make progress towards our objectives" of full employment and 2 percent inflation.

As widely expected, the Fed pushed ahead with plans to wind down one of its main stimulus programs, reducing its monthly bond purchases to $35 billion from $45 billion.

Among the day’s largest gainers was FedEx, which ended the day up 6.2 percent to close at $148.95 after hitting an all-time intraday high of $149.34. The world's second largest package delivery company reported better-than-expected quarterly revenue. The stock's gain helped push the Dow Jones transportation average up 1.5 percent.

Amazon rose 2.7 percent to $334.38 after Chief Executive Officer Jeff Bezos unveiled a "Fire" smartphone with free, unlimited photo storage, jumping into a crowded field dominated by Apple and Samsung.

Adobe Systems ended the day up 8.2 percent to $73.08. Adobe was the S&P 500's best performer a day after the company reported better-than-expected quarterly earnings and revenue.

ConAgra fell 7.3 percent to $30.47 after the maker of Hunt's tomato ketchup and Slim Jim beef jerky warned about fourth-quarter results.

Approximately 5.94 billion shares changed hands on the major equity exchanges, above last month's average of approximately 5.76 billion shares, according to data from BATS Global Markets.

Fed Reduces Economic Growth Outlook

The Federal Reserve on Wednesday hinted at a slightly faster pace of interest rates increases starting next year, but suggested rates in the long-run would be lower than it had indicated previously.

After a two-day policy meeting, the Federal Reserve reduced its forecast of economic growth to a range of between 2.1 percent and 2.3 percent from an earlier forecast of around 2.9 percent, but expressed confidence the recovery was largely on track. It also reduced its monthly asset purchases from $45 billion to $35 billion a month, divided between $20 billion of Treasury securities and $15 billion of mortgage-backed debt, as widely expected.

"Economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually," the Fed said in a statement. "Household spending appears to be rising moderately and business fixed investment resumed its advance."

Updated economic forecasts from Fed officials reflected an economy slammed by bad weather at the start of the year but poised to continue growing. Fed officials maintained their growth projections for 2015 and 2016, and foresaw a faster drop in unemployment and an inflation picture that remained benign.

In updated interest rate projections, Fed officials still foresaw rates beginning to rise next year. Of 16 individual rate hike projections, the median interest rate stood at 1.125 percent by the end of 2015, up just a hair from March. However, Fed officials projected a slightly more aggressive path of interest rate hikes for the following year, with the end-year median placed at 2.5 percent versus 2.25 percent in March.

The Fed also lowered its projections for long-term interest rates, a potential sign of reduced confidence in the economy's long-run potential. The median projection was for a long-term federal funds rate of around 3.75 percent, compared to around 4 percent in March.

The Fed cut overnight rates to near zero in December 2008 as it battled the financial crisis and deep recession. The timing and pace of renewed rate increases is one of the key decisions facing the central bank as the current recovery evolves.

Financial market reaction to the Fed's statement was muted. Stock prices were little changed, while yields on longer-dated government bonds rose modestly. The dollar moved higher against the euro and the yen.

Its policy statement changed little from the one issued after its last meeting in April, repeating that interest rates would remain near zero "for a considerable time" after the bond buying ends. The Fed said unemployment remained "elevated" despite recent job growth, and noted that its preferred measure of inflation was still running below its 2 percent target.

There were no further details provided in the statement about the Fed's plans to exit other aspects of the extraordinary measures it has taken in response to the crisis. For now, the Fed said it would continue reinvesting proceeds of its asset holdings as they mature.

The composition of the Fed's policy-making ranks has changed recently, with two new members on the central bank's board and a new head of the Cleveland Federal Reserve Bank, further complicating the message from the forecasts.

In its quarterly projections, Fed officials took into account the sour start the economy got this year after severe winter weather crippled activity in major cities around the country. The government said last month that GDP shrank at a 1 percent annual rate, and economists say data since then imply a much deeper contraction.

Although growth now appears to be rebounding, there remain weak spots, particularly in the housing sector. Fed officials described risks to the economy and labor market as "nearly balanced."

Amazon Announces Expected Smartphone

Jeff Bezos, Amazon’s Chief Executive Officer, unveiled a $200 "Fire" smartphone on Wednesday equipped with a 3D-capable screen and an ability to recognize music and TV shows. Amazon’s objective of course is to stand out in a crowded field dominated by Apple and Samsung.

Bezos, in a rare media appearance, demonstrated three-dimensional display features on the 4.7-inch device, from depth perception in maps and pictures to the ability to shift perspectives and reveal new information when the phone is tilted.

"What if there were a thousand artists standing by to redraw the picture every time you moved your head?" Bezos remarked to hundreds of Amazon customers, reporters and industry executives gathered in Seattle for the unveiling.

The smartphone joins Amazon's "Fire" lineup of tablets and streaming devices. It represents the retail giant's attempt to extend its dominance of online commerce into mobile phones, which are increasingly being used to buy items and view video.

The price of the phone will start at $199.99 for a 32-gigabyte storage version with a two-year contract on AT&T.