Last week was a tough one for stock investors. It started with a little hope when the market bounced a bit last Monday, but those hopes were dashed as the major indices reversed on Tuesday then reacted to the Fed announcement on Wednesday. For the rest of the week, markets dropped around 6.5% from Monday’s high to Friday’s low. It wasn’t the seventy-five basis point rate hike that came from the FOMC meeting that spooked traders, though. They had anticipated that.
No, they were spooked by the tough language that accompanied it. That may seem like a distinction without a difference right now, but it does actually give some hope that there could be some relief soon, with at least a pause in the selling this week, and maybe even a bounce.
That is because while the Fed’s actions in hiking rates again were in line with the market’s expectations last week, the negative reaction came because of the tough-sounding words coming from Jay Powell. The question, though, is how much weight the market will give to those words as traders and investors take a more sober, nuanced look at them.
He is, after all, the man that spent months telling us that we shouldn’t worry about the inflation that we all saw and felt every time we went shopping, because it was transitory. He is the man who delayed reacting to it until it was too late, and the problem was worse than it should have been. He is part of a body, the FOMC, whose collective wisdom gave us a forecast for rates around 1-1.5% for 2022 just nine months ago, and who now have a target rate well over 4%.
That raises a question: What value should we put on tough, resolute words when they come from someone in the middle of a flip-flop of gigantic proportions?
Very little, probably, and the market will realize that as the initial shock wears off. That, and proximity to the now-significant June low makes another big down week less likely than some form of consolidation over the next few days.
Rates are, as compared to the last decade or so, high. There has to be an adjustment to that, if for no other reason than that an available 4% return on a 1-Year T-Bill reduces the attractiveness of risky equities for fund managers and other big investors. That is why I and others have been bearish on stocks for several months. As that adjustment takes place though, the simultaneous selling of bonds and stocks will come to an end.
Bond selling will probably stabilize, and then we may even see some buying. Bond prices and yields move in opposite directions, so that will naturally lead to a stabilization and maybe even a decrease in market interest rates. While stocks will be sold to some extent to finance those bond purchases, a lot of those sales have already happened, and as rates pull back, or at least stop climbing, some equity buying will return.
So, perhaps ironically, stock investors may get some relief this week as the market takes a more nuanced look at Powell’s tough talk in light of his record so far. That record suggests that what he says now doesn’t have much bearing on what he will do even a few months from now, so the selloff at the end of last week looks like a bit of an overreaction, and a short-term bounce in stocks is possible.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Other Topics
Markets Investing Economy Central Banks
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
Read Martin's Bio