Markets ended last week in a panic following three previous losing weeks.
The Dow slid 981 points for a 2.82% daily loss after Federal Reserve Chairman Jerome Powell said a 50 basis point hike in interest rates was “on the table” for the central bank’s next meeting in May.
That seemed to cement what markets were increasingly coming to expect, but it acted as a spark to investors concerned about slowing corporate profits, rising bond yields, runaway inflation and the lengthening war in Ukraine. Earlier in the week, the International Monetary Fund lowered its 2022 global growth forecast to 3.6% from 4.4%.
This week presents an opportunity for markets to rebound, with corporate earnings reports from some of the economy’s true behemoths – from Apple, Microsoft, Amazon and Google to Coca Cola, Boeing, UPS, GM and Ford. That will give a good read on how a broad swath of the economy is doing and, more importantly, what companies see for the future.
A bevy of economic reports last week portrayed an economy with still a lot of strength. Jobless claims continue to fall while home prices are maintaining their upward trajectory.
This week brings reports on consumer confidence, the gross domestic product, home sales and personal spending. If GDP growth in the first quarter comes in above the consensus forecast of 1.1%, it will mean the economy did not slow down as much as has been expected from its pace of 6.9% in the fourth quarter.
Political Cartoons on the Economy
Dominating it all will be the guessing game of when, and what it will take, to rein in consumer prices that have been running at an annual rate of more than 8%. That is four times the Fed’s own goal of 2% and also the highest pace in four decades.
Powell’s comments and the Fed’s move in March to begin raising rates from historic lows during the pandemic show the central bank means business. But with a red-hot labor market and energy and commodity prices elevated on account of the war in Ukraine, it may well require more from the Fed than markets expect.
Analysts say a repricing of stocks is underway as investors come to grips with the realization that the formula of steady earnings increases and expanded valuations of companies may not be the elixir it has been for the past several years.
“A repricing of stocks is currently taking place due to rising interest rates, which mathematically makes stocks less attractive,” says David Bahnsen, chief investment officer at The Bahnsen Group. “Higher interest rates are especially troublesome for stocks trading at sky-high valuations, particularly in the technology sector.”
Looking over that sector and the market generally is the fate of Twitter, with reports early Monday that Elon Musk is still eyeing the social media giant.
The Fed meets May 3-4 and is expected to bump up its interest rate hikes to the 50 basis point level, while also announcing the start of a plan to reduce its $9 trillion balance sheet that swelled during the coronavirus pandemic. The combination of rate hikes and balance sheet runoff marks an abrupt reversal of the accommodative monetary policy that has been in place for a while.
“Regardless of the exact magnitude, the May 3-4 FOMC meeting likely will send a clear signal from monetary policymakers,” economists at Wells Fargo wrote early Monday. “The first 50 bps rate hike in over 20 years and the start of balance sheet runoff shows that the Federal Reserve means business in its fight against inflation.”
Stocks were primed for a fall early Monday, with Dow Jones Industrial Average futures down around 300 points in pre-market trading. Yields on bonds, meanwhile, fell, signaling that maybe the market is becoming more accustomed to the Fed’s new hawkish posture.