The Dow Fell Because the Fed Can Do Little Now to Boost Stocks

Stocks ended mixed on Wednesday. A fiscal-stimulus bill looks increasingly likely to pass soon, but the Federal Reserve is also clearly unable to add much more economic and market support than it already has.

The Dow Jones Industrial Average fell 44.77 points, or 0.15% to close at 30154.43. The S&P 500 rose 0.2%. The tech-heavy Nasdaq Composite rose 0.50%.

The loss on the S&P 500 would have been worse if not for big tech stocks charging ahead. Those stocks have outsize market-capitalization weighting in the index. Amazon (ticker: AMZN) and Microsoft (MSFT) rose 2.4%. The S&P 500 Equal Weight Index, which weights the movements of all stocks equally, fell 0.15%. The movement of that index is generally seen to be more representative of investors’ view of the economic outlook than the regularly cited market-cap-weighted index.

One of the biggest gainers on the S&P 500 was Chipotle (CMG), up 4% after receiving an upgrade at Stifel.

A $908 billion fiscal-stimulus package was split into two bills, and members of Congress said they would be passed soon. The legislation would put cash directly into the hands of small businesses and households. One impetus for agreement was the report on retail sales, which fell 1.1% for November, missing estimates of a 0.4% decline and worse than the prior reading of a 0.1% decline.

Continued weak economic data, in the face of increasing pandemic lockdowns, is likely to nudge Congress toward a fiscal relief bill sooner rather than later, Mike Loewengart, managing director of investment strategy at E*Trade, wrote in emailed remarks to reporters.

Stocks have risen sharply in the past month and some strategists say the market appears overbought. Strategists at Bank of America said earlier this week the S&P 500 is likely to fall a few percentage points within the next month.

Meanwhile, the Federal Reserve updated investors on monetary policy on Wednesday, an event that coincided with a sharp but brief decline in stocks. The Fed spoke at 2 p.m. Eastern time. Between 2:05 and 2:20, the Dow hit an intraday low of 30091. The Fed said it would continue its pace of Treasury and mortgage-backed security purchases—actions that keep interest rates low and the economy stimulated—until it sees improvement in economic conditions.

“There isn’t a surprise in the statement other than some people were expecting additional details on whether they would change the allocation, timing or quantity of purchases,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, wrote in emailed remarks to reporters.

Stock valuations are already pricing in ultralow interest rates, which boost the value of corporate profits. But some had expected the Fed to increase the proportion of bond purchases represented by longer-dated Treasury bonds. This would keep the price high and interest rate low, in a bid to push investors to buy more longer-dated corporate and mortgage bonds. That, in turn, lowers the cost of borrowing for companies and households.

The Fed isn’ implementing that strategy at the moment. Still, many have noted recently that Fed actions can mean more stock market downside than upside at this point. “The degree to which [the Fed] can affect things at the margins has gone down,” Brian Nick, chief investment strategist at Nuveen, said in an interview.

Quincy Krosby, chief investment strategist at Prudential Financial, called the Dow’s initial move down after the Fed spoke a “knee jerk reaction.” Indeed, the Dow ended the day off its session low.

Consensus on Wall Street remains that stocks have plenty of upside for the next year.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com