Jackson Hole has come and gone, and the only surprise may be that the stock market was surprised.
But he was surprised. The stock market started last week on its feet, a fitting response as investors appeared to realize they may have overestimated the chances of a disastrous Federal Reserve. However, the market regained ground ahead of Friday’s session as investors bought the dip. Then Chairman Jerome Powell began to speak. He told conference attendees that the Fed needed to bring inflation back to its 2 percent target, that doing so would take time and that another big rate hike was likely in September. The speech, which could have lasted 30 minutes, lasted only 10.
“Fed Chairman Jerome Powell’s speech today at the Fed’s Jackson Hole conference was short and punchy,” writes Ed Yardeni, chief investment strategist at Yardeni Research. “Long-held expectations that the Fed would end its tightening and could cut interest rates next year were dashed.”
It never did, and the markets didn’t miss the message. The Dow Jones Industrial Average fell 3% on Friday and ended the week down 4.3%, while the
The index fell 3.4% to close the week off 4.%. It was their worst weeks since June.
It’s not like investors are worried about what will happen at the next meeting. According to the CME FedWatch tool, the futures market was pricing in a 61% chance of a three-quarter rate hike after Powell’s speech on Friday, up from 64% the day before. The real fear doesn’t seem to be the size of the next hike, but when the hikes will stop and how long rates will stay high — even if that means triggering a recession. “[We] don’t think the central bank is ready to ‘turn’ yet,” writes Thomas Mathews, market economist at Capital Economics. “This, we suspect, means the central bank will remain a headwind for markets for some time to come.”
And especially for expensive growth stocks. It should come as no surprise that the tech heavy
took the brunt of the damage, falling 3.9% on Friday to close the week down 4.4%. This makes sense since expensive growth stocks are more sensitive to rising interest rates and stocks like
(point: NVDA) and
( TTD ), trading at 42.7 and 57.9 times earnings, respectively, still aren’t cheap.
However, investors cannot give up. According to data from Goldman Sachs, growth funds loaded up on stocks trading at 20 times enterprise value/sales or higher in the second quarter of the year. This meant adding stocks like
(SNOW), Trade Desk and Nvidia, among others. That worked well during the turnaround from the June low, but could be especially painful if the Fed is to raise rates higher than investors expected. and subsectors and ‘long’ stocks are being hit the hardest,” writes Wolfe Research strategist Chris Senyek.
It could have a rough ride from now to the Fed’s next meeting on September 2.
Write to Ben Levisohn at Ben.Levisohn@barrons.com