Dow drops 643 points, stocks post worst day since June as investors question Fed pivot thesis

Dow drops 643 points, stocks post worst day since June as investors question Fed pivot thesis

U.S. stocks posted their worst daily decline in two months on Monday on fears that the recent rally was based on an overly optimistic view that the Federal Reserve would move away from sharply higher interest rates to fight inflation. .

How were the shares traded?
  • The Dow Jones Industrial Average DJIA,
    -1.91%
    closed down 643.13 points, or 1.9%, at 33,063.61 after falling to 699.11 points earlier in the day.

  • The S&P 500 SPX closed down 90.49 points, or 2.1%, at 4,137.99 points.

  • The Nasdaq Composite COMP,
    -2.55%
    ended down 323.64 points, or 2.6%, at 12,381.57.

Last week, the Dow Jones Industrial Average closed down 54.31 points, or 0.2%, at 33,706.74. The S&P 500 closed down 51.67 points, or 1.2%, at 4,228.48, while the Nasdaq Composite was down 341.97 points, or 2.6%, at 12,705.22.

What moved the markets?

Stocks ended Monday with sharp declines as investors expressed caution over a range of monetary, technical and seasonal factors. The Dow industrials and the S&P 500 had their worst drops since June 16, while the Nasdaq Composite had its worst drop since June 28, according to Dow Jones Market Data.

Until the last few days, the benchmark S&P 500 had been rebounding strongly from its mid-June lows, in part on the hope that indications of peak inflation would allow the Fed to slow the pace of interest rate hikes and even turn to a dovish trajectory next year.

However, that assumption was challenged last week by a succession of Fed officials who appeared to be warning traders about adopting a less aggressive monetary policy narrative. Central bankers will meet this week for their annual retreat in Jackson Hole, Wyo., and Federal Reserve Chairman Jerome Powell is expected to deliver a highly anticipated speech on the economic outlook.

“Markets have been very complacent about the outstanding risks to the macroeconomic environment,” said Michael Reynolds, vice president of investment strategy at Glenmede, which manages $45 billion in Philadelphia assets. “We see the risk of recession at 50%, maybe even higher, in the next 12 months. Based on where we are, the market looks a little overheated on these valuations and we remain underweight stocks.”

“Risk to earnings is what matters most to investors and there is downside risk here for markets,” Reynolds said by phone on Monday.

Powell’s Jackson Hole speech on Friday will be a “double-edged sword” for markets, as it gives traders and investors more certainty about the path of rates, along with the need to adjust their expectations, according to Reynolds. . “Markets are underestimating how much the Fed needs to tighten and how high rates need to remain to bring inflation back under control. The market needs to accept how much the Fed needs to tighten here. Part of what we expect from Jackson Hole is that Powell comes out very strong and says the Fed will tighten even if there is a risk of a recession. It’s a serious message that could lead to more risky moves.”

To see: Here are 5 reasons why a rally in stocks could be about to turn into a bear market.

Falling bond yields earlier this summer helped support equities in their recent rally. But after falling below 2.6% in early August, the TMUBMUSD10Y 10-year yield,
3.021%
moved above 3% again on Monday.

Another issue that worries bulls is the failure of the S&P 500 to break through a key technical level, raising fears that the market will remain in a downtrend. The large cap index had its second straight loss of 1% or more on Monday, the longest streak since the four trading sessions ended June 13, according to Dow Jones Market Data.

Source: Guggenheim

“We’re seeing fears that the Federal Reserve will act aggressively or continue to act aggressively on raising interest rates and dragging equities down,” said Fiona Cincotta, senior financial markets analyst at the City Index in London. “The market is realizing that the Fed is unlikely to have a dovish pivot anytime soon, even though there was a milder inflation reading a few weeks ago.”

“Powell’s speech will be this week’s key event, but the market no longer expects a dovish pivot from the Fed, which is why we see equities under pressure and the dollar rising,” she said by phone. Now that the S&P 500 has dropped below 4,180, this opens the door for the index to continue falling to 4,100 or 3,970, according to Cincotta.

To see: Once offering the worst return on Wall Street, cash now seems like the best asset to own, says Morgan Stanley and ‘Uncomfortable’ with S&P 500 valuations? Investors may still find ‘bargains’ in small-cap stocks, says RBC

The DXY dollar index,
+0.02%
is back near 20-year highs as concerns over the European economy amid rising energy prices pull the euro EURUSD,
-0.08%
below par with the buck. A strong dollar is associated with weaker equities as it erodes the foreign earnings of US multinationals, making them less valuable in US dollar terms.

Which companies were in focus?
  • shares of AMC Entertainment Holdings
    AMC,
    -5.51%
    ended down 5.5% when the company’s new class of preferred shares began trading under the ticker ‘APE’.

  • It means health
    SGFY,
    +32.08%
    Shares closed up 32.1% after a Wall Street Journal report said Amazon.com Inc. is among several companies competing for the home health service provider. The healthcare company is said to be up for sale at an auction that could value it at more than $8 billion, according to The Wall Street Journal, citing people familiar with the matter.

  • Travel stocks tumbled with cruise line stocks Carnival Corporation
    CCL,
    -4.86%,
    Royal Caribbean Group
    RCL,
    -4.72%
    and Norwegian Cruise Line Holdings
    NCLH,
    -4.78%
    ending in declines of 4.9%, 4.7% and 4.8%, respectively.

How have other assets fared?
  • The TMUBMUSD10Y 10-year Treasury yield,
    3.021%
    it rose 4.8 basis points to 3.04%, the highest since July 20, based on 3pm levels.

  • The general risk tone in the market impacted most asset classes. Crude futures were lower, with the September WTI contract down 54 cents, or 0.6%, to finish at $90.23 a barrel on expiration day.

  • Gold futures posted their smallest sell-off in nearly four weeks, falling for the sixth straight session in the longest losing streak since early July. GCZ22 gold futures,
    -0.05%
    for December delivery fell $14.50, or 0.8%, to $1,748.40 an ounce, the lowest most active contract since July 27, FactSet data show.

  • The ICE US Dollar Index DXY,
    +0.02%,
    an indicator of the dollar’s strength against a basket of rivals, it rose 0.8% at 109, surpassing the multi-decade high it reached last month.

  • Bitcoin BTCUSD,
    +1.39%
    fell 0.7% to $21,075.

  • In Europe, the Stoxx 600 SXXP stock index,
    -0.96%
    ended down 1%, while the UK stock market benchmark FTSE 100 Z00,
    -0.11%
    closed 0.2% lower. In Asia, most exchanges also dropped, although China’s Shanghai Composite SHCOMP,
    +0.61%
    bucked the trend of ending 0.6% after the country’s central bank cut mortgage rates to support the struggling housing sector.

— Jamie Chisholm contributed to this article.

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