Fed Chairman Jerome Powell’s speech has hung over markets all week.
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The Dow dropped more than 1,000 points Friday, after Federal Reserve Chairman Jerome Powell made hawkish remarks about monetary policy at the annual Jackson Hole Symposium, even in the face of declining inflation.
The Dow Jones Industrial Average dropped 1,008 points, or 3%, while the S&P 500 declined 3.4%, and the Nasdaq Composite fell 3.9%. The indexes are snapped a two-day winning streak. This was the Dow’s worst day since May 18 and it was the S&P 500’s worst day since June 13. Friday also marked the Nasdaq’s worst performance since June 16.
“Key message: expect more volatility and tougher conditions for equities,” wrote Cliff Hodge, chief investment officer for Cornerstone Wealth.
Powell highlighted that the Fed will take a policy stance that is meant to restrict inflation and economic growth. The last couple of inflation results showing cooling price increases, he noted, are too small a sample size to compel the Fed to back off from its restrictive policy right now.
“Chair Powell threw cold water on the market’s belief that the Fed will move to marginally restrictive policy and then pause,” wrote Jeff Klingelhofer, co-head of investments at Thornburg Investment Management. “The Fed will not rest until they gain significant confidence that inflation is on a clear path back toward 2%.”
Data released Friday showed the Fed’s preferred inflation metric, the core personal consumption expenditures index, rose 4.6% year over year in July, down from June’s 4.8% increase.
Still, rates rose Friday. The 2-year Treasury yield, which attempts to forecast the level of the fed funds rate a couple years from the present, rose about 3.39%, a hair below its multi-year high last hit in mid-June.
That means, right now, that the stock market isn’t getting what it wanted. The equity market would like to see indications that the pace of rate hikes will slow down, especially since it’s has rallied this summer in hopes of fewer hikes.
Entering Friday, all three major indexes had risen double digits in percentage terms from their mid-June lows for the year, and the market now hopes that the Fed will lift the funds rate by just half a percentage point in September. But the fed funds futures market is pricing in about a 61% chance of a three-quarter point hike, up from about 45%, where it sat for a few minutes just before Powell spoke this morning.
There is good news, though. The Fed may have to lift interest rates aggressively for the next few months, but it may still slow down after that period, especially if inflation can keep declining. The terminal fed funds rate, or the rate at which the Fed will stop hiking, is still less than 50% likely to go all the way up to 4%.
“The quiet part they’re [the Fed] not saying out loud is that those kind of short term rates would be really punishing to risk markets,” said James Camp, managing director of strategic income at Eagle Asset Management.
In fact, Powell did leave open the possibility of the smaller half point increase in September, saying that the Fed will wait to see more economic data before deciding. So on the aggressive rate-hiking—or hawkish—rhetoric, “he hardly pounded the table,” wrote Gerard MacDonell, economist at 22V Research.
Consistent with that hint of optimism is that the stock market isn’t falling to a scary level at the moment.
The S&P 500, while dropping, is still above its 50-day moving average, which indicates that market participants are still confident enough in the economic and market outlook to buy at prices consistent with their recent trends.
That’s for now. Monday’s open of trading will be telling, as further declines could bring the index below its 50-day moving average.
Here are some stocks on the move Friday:
Seagen (ticker: SGEN) tumbled 5.7% following a report that talks by Merck (MRK) to acquire the company—in a deal that has been estimated at around $40 billion—have stalled. Merck stock was flat.
Everbridge (EVBG) jumped 17% following a report that the enterprise software company is exploring a sale to the likes of an industrial company or private equity group.
Marvell Technology (MRVL) fell 8.9% after the data center semiconductor maker issued a tepid sales forecast for the third quarter, expecting revenue of around $1.56 billion—below the $1.58 billion eyed by Wall Street.
Sanofi (SNY) rose 0.8% Friday after analysts at Citi put the stock on a positive catalyst watch as the settlement on a case over the drug Zantac may be significantly lower than the $20 billion expected by the market.
First Solar (FSLR) stock gained 0.1% after getting upgraded to Buy from Neutral at Bank of America.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com
