Dow loses 643 points, stocks post worst day since June as investors question Fed’s pivot position

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 will move away from sharply higher interest rates to fight inflation.

How did the shares trade?
  • The Dow Jones Industrial Average DJIA,
    closed up 643.13 points, or 1.9%, at 33,063.61, after falling as much as 699.11 points earlier in the day.

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

  • The Nasdaq Composite COMP,
    closed with a drop of 323.64 points, or 2.6%, at 12,381.57 points.

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

What drove the markets?

Stocks closed heavily lower on Monday as investors expressed caution over a range of currency, technical and seasonal factors. The Dow industrials and S&P 500 had their worst declines since June 16, while the Nasdaq Composite posted its worst since June 28, according to Dow Jones market data.

Until recent days, the benchmark S&P 500 had rallied sharply from its mid-June lows, partly on hopes that signs of peak inflation would allow the Fed to slow the pace of rate hikes and even shift to a adventurous trajectory 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, Wyo., and Federal Reserve Chairman Jerome Powell is expected to deliver a much-anticipated speech on the economic outlook.

“Markets have been overly complacent about the pending risks to the macro environment,” said Michael Reynolds, vice president of investment strategy at Glenmede, which oversees $45 billion in assets from Philadelphia. “We see the risk of a recession at 50%, maybe higher than that, in the next 12 months. Based on where we are, the market seems a little overheated at these valuations and we continue to be underweight stocks.”

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

Powell’s Jackson Hole speech on Friday will be a “double-edged sword” for markets, giving traders and investors more certainty about the path of interest 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 interest rates need to stay to bring inflation back under control. The market needs to come to terms with how hard the Fed needs to tighten here. Part of what we expect from Jackson Hole is for Powell to come out strong enough to say the Fed will tighten even if it risks recession. It’s a discouraging message that could lead to further risk aversion.”

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A drop in bond yields earlier this summer helped support stocks in their recent rally. But after falling below 2.6% in early August, the 10-year yield TMUBMUSD10Y,
it moved back above 3% on Monday.

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 posted its second straight loss of 1 percent or more on Monday, its longest such streak since the four trading days 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 in raising interest rates drag stocks lower,” said Fiona Cincotta, senior financial markets analyst at City Index in London. “The market realizes that the Fed is unlikely to have a pivot any time soon, even though there was a softer indication of inflation a few weeks ago.”

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

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The dollar index DXY,
returns near 20-year highs as concerns about the European economy amid rising energy prices pull EURUSD;
below parity 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.

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

  • It means Health
    Shares closed down 32.1% after a Wall Street Journal report said Inc. is among several companies bidding for the home health service provider. The health care company is said to be sold in 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 fell with cruise line stocks Carnival Corporation
    Royal Caribbean Group
    and Norwegian Cruise Line Holdings
    falling by 4.9%, 4.7% and 4.8% respectively.

How did other assets fare?
  • The yield on the 10-year Treasury TMUBMUSD10Y,
    rose 4.8 basis points to 3.04%, its highest since July 20, based on 3 p.m. levels.

  • The overall risk exit tone in the market affected most asset classes. Oil futures fell, with the September WTI contract slipping 54 cents, or 0.6%, to settle at $90.23 a barrel on the day of expiration.

  • Gold futures recorded their lowest settlement in nearly four weeks, falling for a sixth straight session for the longest losing streak since early July. GCZ22 Gold Futures,
    for December delivery fell $14.50, or 0.8%, to settle at $1,748.40 an ounce, the lowest most active contract since July 27, according to FactSet data.

  • The ICE US Dollar DXY Index,
    an index of the dollar’s strength against a basket of rivals, rose 0.8 percent to 109, surpassing a multi-decade high hit last month.

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

  • In Europe, the Stoxx 600 stock index SXXP,
    ended down 1%, while the UK’s benchmark FTSE 100 Z00,
    closed 0.2% lower. In Asia, most stocks were also lower, although China’s Shanghai Composite SHCOMP,
    bucked the trend to end up 0.6% after the country’s central bank cut mortgage rates to support the troubled property sector.

— Jamie Chisholm contributed to this article.

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