Market Perspective for May 8, 2022

The stock market once again experienced a volatile week. The major market indexes finished down again, mainly due to the Federal Reserve and interest rates. The Dow Jones Industrial Average was down for its sixth straight week, and the Nasdaq recorded its fifth straight weekly loss for the first time since 2012.

The markets started the week flat, waiting for the Fed rate hike announcement, and then it became a roller coaster ride. On Wednesday, the Federal Reserve announced the much-anticipated 50 basis point increase. What was surprising was the stock market rally after the announcement.

After the Fed made its announcement on Wednesday, the Dow Jones Industrial Average gained 932 points or 2.81 percent, its best day since November 9, 2020. The S&P 500 gained 2.99 percent, and the Nasdaq was up by 3.19 percent by the end of the day.

For the day, all 11 S&P 500 sectors were positive, with energy as the best performing sector. Financials also did well, with Bank of America and Wells Fargo up about 4 percent. Tech stocks also participated in the rally, with Apple up 3 percent and Meta Platforms up 5 percent.

Federal Reserve Chairman Jerome Powell had quite a bit to say during his press conference, which had a lot to do with the stock market rally. The markets liked it when he said the Fed has ruled out any larger rate hikes, and there will be no 75 basis point increases. However, he said to expect another one or two additional 50 basis point increases to fight inflation.

Powell also added that the economy is still strong thanks to consumers with money to propel the economy and solid corporate balance sheets. He also hinted that the worst of the sharp rises we’ve seen in inflation could be ready to ease up.

To wrap up the announcement, Chairman Powell stated that the Fed has a good chance of restoring stable prices without causing a significant increase in unemployment or a sharp slowdown in the economy.

Fed funds futures are now pricing in a 52 basis point hike at the June meeting, which is down from 61 bases points before the announcement. The futures market is now expecting a fed funds rate of 2.80 percent by the end of this year, which is down from 2.96 percent.

The market gave back all of Wednesday’s gain on Thursday when the 10-year Treasury yield jumped above 3 percent for the first time since 2018. That triggered a major pullback in all major market indexes, with all of Wednesday’s gains gone by noon on Thursday.

By the end of trading on Thursday, the Dow Jones Industrial Average dropped 1,120 points or 3.3 percent, the S&P 500 lost 3.7 percent, and the Nasdaq Composite Index fell 5.2 percent. One Wall Street strategist believes that the rally on Wednesday were shorts rushing to cover.

The sell-off affected almost all stocks, with more than 90 percent of the stocks listed on the S&P 500 declining on the day. E-commerce stocks were especially hard hit when Etsy and eBay reported weaker than expected revenue guidance. Etsy lost 16.8 percent, eBay lost 11.7 percent, and Shopify dropped almost 15 percent for the day when they missed top and bottom-line estimates.

Tech stocks gave back all of Wednesday’s gains and more, with Amazon losing 7.6 percent, Meta Platforms dropping 6.8 percent, Microsoft falling 4.4 percent, and Apple losing 5.6 percent.

For the year, the Dow Jones Industrial Average is down 9.5 percent, the S&P 500 is down by 13.5 percent, and the Nasdaq composite has now lost 22.4 percent.

The yield on the 10-year Treasury finished the week at 3.13 percent, which is up 1.6 percent for the year. To date, bonds are down 10 percent.

In other economic news last week, employers added 428,000 jobs in April, slightly above expectations, and wages rose 5.5 percent on a year-over-year basis. Oddly, fewer people were participating in the labor force, with 62.2 percent of the population working, down 0.2 percent from March.

It is believed that the resurgence in Covid could be a factor in this, and economists aren’t yet worried that this is a trend. According to the Bureau of Labor Statistics, there were as many as 1.2 million people out of the workforce in April due to illness.

Inflation is still the top concern for the Fed. The war in Ukraine continues to cause shortages of fertilizer, which will affect crops and food prices. China has imposed more lockdowns because of increasing Covid-19 cases in the country, which is leading to continuing supply problems.

This week, the Consumer Price Index will be released on Wednesday and is expected to come in a little below the March figure of 8.5 percent. If so, this could be a good signal that inflation has peaked.

Mortgage rates continued their upward climb as they hit the highest level since 2009 at 5.27 percent, up 17 basis points from the previous week.

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