Dow drops more than 500 points, S&P 500 drops 1.7% as investors question Fed pivot thesis

Dow drops more than 500 points, S&P 500 drops 1.7% as investors question Fed pivot thesis

US stocks tumbled on Monday on fears that the recent rally was based on an overly optimistic view of the Federal Reserve’s potential to move away from using sharply higher interest rates to fight inflation.

How are stock trading?
  • The S&P 500 SPX,
    -2.00%
    dropped 71 points, or 1.7%, to 4,156.

  • The Dow Jones Industrial Average DJIA,
    -1.79%
    dropped 510 points, or 1.5%, to 33,197.

  • The Nasdaq Composite COMP,
    -2.35%
    dropped 260 points, or 2.1%, to 12,445.

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%, to 4,228.48 for the week, while the Nasdaq Composite was down 341.97 points, or 2.6%, to 12,705.22. On Friday, the Nasdaq Composite was up 19.3% from its mid-June low but remained down 18.8% year-to-date.

What is driving markets?

Wall Street was on track for sharp declines as investors expressed caution over a range of monetary, technical and seasonal factors.

The benchmark S&P 500 index rose sharply from its mid-June lows, in part on hopes that indications of peak inflation would allow the Fed to slow the pace of interest rate hikes and even swing into a dovish trajectory in the future. 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,
3.025%
is above 3% again.

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 is on track for its second straight loss of 1% or more, 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, money now seems like the best asset to own, says Morgan Stanley

The DXY dollar index,
+0.81%
is back near 20-year highs as concerns over the European economy amid rising energy prices pull the euro EURUSD,
-1.05%
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,
    -37.90%
    fell 0.2% when the company’s new class of preferred shares began trading under the ticker ‘APE’.

  • It means health
    SGFY,
    +32.38%
    stocks surged nearly 32% 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 such as Carnival Corporation
    CCL,
    -4.26%,
    Royal Caribbean Group
    RCL,
    -4.11%
    and Norwegian Cruise Line Holdings
    NCLH,
    -4.14%
    decreasing by about 4% each.

How are the other assets?
  • The TMUBMUSD10Y 10-year Treasury yield,
    3.025%
    rose 4 basis points to 3.02%.

  • The general risk tone in the market is impacting most asset classes. Oil futures CL.1,
    -1.41%
    were lower as US crude dropped 0.9% to $89.97 a barrel.

  • GCZ22 gold futures,
    -0.77%
    for December delivery fell $12.90, or 0.8%, to $1,750 an ounce, as the dollar rallied and higher Treasury yields continued to weigh on precious metals.

  • The ICE US Dollar Index DXY,
    +0.81%,
    an indicator of the dollar’s strength against a basket of rivals, it rose 0.7% to 108.89, surpassing the multi-decade high it reached last month.

  • Bitcoin BTCUSD,
    -1.22%
    fell 0.9% to $21,328.

  • In Europe, the Stoxx 600 SXXP stock index,
    -0.96%
    ended down 1%, while the UK stock market benchmark FTSE 100 Z00,
    -0.06%
    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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