Dow falls 400 points, S&P 500 falls 1.6% as investors question Fed’s pivot position

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

How are shares traded?
  • The S&P 500 SPX,
    -1.68%
    fell 67 points, or 1.6%, to 4,161

  • The Dow Jones Industrial Average DJIA,
    -1.43%
    lost 438 points, or 1.3%, to 33,268

  • The Nasdaq Composite COMP,
    -2.04%
    fell 260 points, or 2.1%, to 12,442

On Friday, the Dow Jones Industrial Average fell 292 points, or 0.86%, to 33,707, the S&P 500 fell 55 points, or 1.29%, to 4,228 and the Nasdaq Composite fell 260 points, or 2.01%, to 52 .The Nasdaq Composite is up 19.3% from its mid-June low, but remains down 18.8% for the year to date.

What drives markets?

Wall Street was on a steep decline as investors expressed caution over a range of monetary, technical and seasonal factors.

The benchmark S&P 500 had rallied sharply from its mid-June lows, partly on hopes that signs of headline inflation would allow the Fed to slow the pace of rate hikes and even turn to a riskier path next year .

But that assumption was challenged last week by a succession of Fed officials who appeared to caution traders against adopting a less hawkish monetary policy narrative. Central bankers will gather this week for their annual retreat in Jackson Hole, Wyoming, and Federal Reserve Chairman Jerome Powell is expected to deliver a much-anticipated speech on the economic outlook.

“The hawkish argument will prove convincing to Powell and the wider committee. However, risk arguments may limit the extent of hawkish guidance from Powell at this week’s meeting,” noted Citigroup analysts led by chief US economist Andrew Hollenhorst. “Possibly moderately optimistic outcomes would include Chairman Powell clarifying that despite policy rates being in the ‘long-run’ neutral range, appropriate settings are now higher given above-target inflation, or Powell simply signaling that the policy should be expected to continue to tighten. until there are more convincing signs that inflation is moving back toward target.”

“We don’t expect explicit guidance on the size of September’s rate hike, but continue to see a 75bp hike on the session, even if second-hand prices weigh back on core inflation in the August report,” analysts said. in a client note on Monday.

I see: Here are 5 reasons why the rally in stocks may be about to turn into a bear market again

Falling bond yields this summer helped stocks in their recent rally. But after falling below 2.6% in early August, the 10-year yield TMUBMUSD10Y,
3.022%
again approaching 3%.

Another issue worrying the bulls is the failure of the S&P 500 to break a key technical level, raising fears that the market remains in a downtrend. The large-cap index is on pace for a second straight loss of 1 percent or more, its longest such streak since the 4 trading days ended June 13, according to Dow Jones market data.

Source: Guggenheim

“Equities rallied strongly after the Federal Open Market Committee meeting in mid-June, but the S&P 500 struggled to close above its 200-day moving average last week,” Guggenheim analysts said in a note. “Based on the history of previous bear markets, this level (currently 4,320) is important to watch. A failure to break the 200-day moving average could portend much greater losses for the stock in the coming months.”

I see: Once the worst performer on Wall Street, cash now looks like the best asset to own, says Morgan Stanley

The dollar index DXY,
+0.80%
returns to 20-year highs as concerns about the European economy amid soaring energy prices pull EURUSD;
-1.02%
at par with the dollar. A strong dollar is associated with weaker stocks as it erodes the foreign earnings of US multinationals, making them less valuable in US dollar terms.

However, Lori Calvasina, equity analyst at RBC Capital Markets, noted that some investors believed “the summer rally in the S&P 500 made stocks look expensive again,” but she was more optimistic about the market’s outlook.

“The S&P 500 P/E has moved slightly above the average on the bottom-up consensus EPS forecasts and looks even more elevated with our own EPS forecasts of $214 (2022) and $212 (2023),” he said . “But even when we substitute the P/E calculation into our own EPS projections, it’s worth noting that the multiples are still decently below recent significant peaks. In our minds, while this is worrying, it is not enough to put an imminent end to the summer recovery.”

Which companies were in focus?
  • Shares of AMC Entertainment Holdings
    AMC,
    +2.21%
    was in the spotlight on Monday as the company’s new class of preferred shares is set to begin trading under the ticker ‘APE’.

  • It means Health
    SGFY,
    +33.25%
    Shares surged 34% after a Wall Street Journal report said Amazon is among several companies bidding for the home health services provider. The health care company is being sold in an auction that could value it at more than $8 billion, according to the Wall Street Journal.

  • Travel stocks fell with cruise line stocks such as Carnival Corporation
    undefined,
    Royal Caribbean Group
    RCL,
    -3.88%
    and Norwegian Cruise Line Holdings
    NCLH,
    -3.68%
    decreases by about 3%.

How are the other assets?
  • The yield on the 10-year Treasury TMUBMUSD10Y,
    3.022%
    exceeded 3%.

  • The overall risk exit tone in the market affects most asset classes. Oil Futures CL.1,
    -1.60%
    were lower with US crude down 2% to $89.01 a barrel.

  • GCZ22 Gold Futures,
    -0.73%

    GC00,
    -0.73%
    for December delivery fell $17.50, or 1%, to $1,744 an ounce on the Comex, as a stronger dollar and higher Treasury yields continued to weigh on precious metals.

  • The ICE US Dollar DXY Index,
    +0.80%,
    a gauge of the dollar’s strength against a basket of rivals, rose 0.2 percent to 108.38, nearing a multi-decade high reached last month.

  • Bitcoin BTCUSD,
    -0.49%
    fell 1% to $21,296.

  • In Europe, the Stoxx 600 stock index SXXP,
    -0.96%
    fell 1.2%, while the benchmark index of the British stock market FTSE 100 Z00,
    +0.09%
    decreased by 0.4%. In Asia most stocks were also lower, although China’s Shanghai Composite SHCOMP,
    +0.61%
    bucked the trend with a 0.6% rise after the central bank cut mortgage rates to support the troubled property sector.

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