Markets ended last week in a panic after three previous weeks of losses.
The Dow fell 981 points for a daily loss of 2.82% after Federal Reserve Chairman Jerome Powell said a 50 basis point hike in interest rates was “on the table” for the next meeting. from the central bank in May.
That seemed to cement what markets were increasingly expecting, but it acted as a spark for investors worried about slowing corporate profits, rising bond yields, runaway inflation and a protracted war in Ukraine. Earlier in the week, the International Monetary Fund lowered its global growth forecast for 2022 to 3.6% from 4.4%.
This week presents an opportunity for the markets to rally, with corporate earnings reports from some of the true giants of the economy, from Apple, Microsoft, Amazon and Google to Coca Cola, Boeing, UPS, GM and Ford. That will give a good read on how a wide swath of the economy is doing and, more importantly, what companies see for the future.
A batch of economic reports last week portrayed a very strong economy. Jobless claims continue to fall while house prices continue their upward trajectory.
This week brings reports on consumer confidence, gross domestic product, home sales and personal spending. If GDP growth in the first quarter exceeds the consensus forecast of 1.1%, it will mean that the economy has not slowed as much as expected from its 6.9% pace in the fourth quarter.
Political cartoons on the economy
Mastering 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’s four times the Fed’s target of 2% and also the highest pace in four decades.
Powell’s comments and the Fed’s decision in March to start raising rates from record lows during the pandemic show that the central bank means business. But with a red-hot labor market and soaring energy and commodity prices due to the war in Ukraine, he may require more from the Fed than markets expect.
Analysts say a rally in stocks is underway as investors realize the formula of steady earnings gains and expanded company valuations may not be the elixir it has been for the past several years.
“There is currently a rally in stocks 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 problematic for stocks that trade at sky-high valuations, particularly in the technology sector.”
Looking over that sector and the broader market is Twitter’s fate, with reports early Monday that Elon Musk is still eyeing the social media giant.
The Fed meets on May 3-4 and is expected to increase its interest rate increases to the 50 basis point level, at the same time that it announces the start of a plan to reduce its $9 trillion balance sheet that increased during the coronavirus pandemic. The combination of rate hikes and balance sheet mismatches marks a sharp reversal of the accommodative monetary policy that has been in place for some time.
“Regardless of the exact magnitude, the May 3-4 FOMC meeting will likely send a clear signal from policymakers,” Wells Fargo economists wrote early Monday. “The first 50 bps rate hike in over 20 years and the start of the balance sheet sell-off shows that the Fed is serious about fighting inflation.”
Stocks were poised for a drop early Monday, with Dow Jones Industrial Average futures down around 300 points in premarket trading. Meanwhile, bond yields fell, indicating the market may be getting more accustomed to the Fed’s new hawkish stance.