According to David Donabedian, chief investment officer of CIBC Private Wealth US, investors seem to doubt the ability of the Federal Reserve to control inflation without triggering a major economic slowdown.
The Fed’s interest rate hike on Wednesday – the second of seven scheduled for 2022 – could make borrowing more expensive for businesses and households. This is supposed to ease inflationary pressures. But Fed officials are trying to raise interest rates at such a pace that it doesn’t completely stifle economic growth, a difficult balance to strike. If the economy cools too quickly, it could slip into a recession, generally defined as two consecutive quarters of decline.
History has also shown that “most Fed tightening cycles have led to recession,” Donabedian said Friday in emailed comments to The Post, noting that skepticism is likely to persist until that there is clearer evidence that inflation is easing.
“For most of the past decade, ‘buying the dips’ has been a profitable way to make money work,” Donabedian said. “But rising interest rates and a plan to drain liquidity from markets is a buzz kill, so ‘selling the bounces’ may be more in vogue for a while.”
The Dow Jones closed Friday at 32,899.37, down 98.60 points, or 0.3%. The broader S&P 500 index lost 23.53, or 0.6%, to end trading at 4,123.34. The Nasdaq – which has been hit hard as investors dump high-flying tech companies – fell 173.03 points, or 1.4%, to 12,144.66.
The Dow plunges more than 1,000 points as fears over the economy intensify
The trends held despite a better-than-expected jobs report, which showed the United States added 428,000 jobs in April amid a number of forces threatening economic growth. Relief over the strength of the labor market – with unemployment steady at a pandemic low of 3.6% – was quickly overshadowed by concerns over rising interest rates.
“Friday’s strong job numbers and strong wage growth confirm the Federal Reserve’s plans to raise interest rates to rein in rising inflation, which is driven in part by the tight labor market. and rising wages,” said Robert Schein, chief investment officer of Blanke Schein Wealth. Management, in comments emailed Friday to The Post.
“The stock market is not thinking about how the economy has performed over the past few months, but rather what the economy will look like over the next 6 to 12 months,” Schein noted.
US unemployment rate remains at 3.6%, near 50-year low
Stocks have swung wildly this week – soaring one day and pitching up the next – as investors tried to figure out the Fed’s approach to reining in runaway inflation seeping into every aspect of American life. . Mortgage rates are now at their highest level since 2009, according to data released Thursday by Freddie Mac, with the 30-year fixed average climbing to 5.27%. It was 2.96% at the same time last year.
Rising mortgage rates weighed on Zillow’s results; Shares fell 4.5% despite lower earnings and revenue as the real estate platform presented a bleak outlook for the next quarter, citing market uncertainty.
While Wall Street’s swings seem dizzying, the reality is that the reset is in line with historical precedent: Over the past 70 years, the S&P 500 has averaged a maximum decline of 14% per year.
Year-to-date, the S&P 500 has fallen 13.5%, according to MarketWatch, while the Dow is down nearly 9.5% and the Nasdaq 22.4%.
The unease is reflected in readings from Wall Street’s “fear gauge,” the CBOE Volatility Index, which rose 90% for the year, according to MarketWatch.
Moods were sour overseas as well, with investors factoring in the continued economic fallout from the war in Ukraine and the pandemic.
Mortgage rates hit their highest level in nearly 13 years
Asian markets declined overall as China’s severe pandemic restrictions continued to weigh on trading activity; widespread coronavirus outbreaks have crippled entire cities and hampered manufacturing and shipping centers across the country. With the exception of Japan’s Nikkei 225, which closed nearly 0.7% higher, all major indexes posted losses. Hong Kong’s Hang Seng Index fell 3.8%, while the Shanghai Composite Index fell more than 2%.
“There will be more than a few rather happy investors than today’s Friday,” Danni Hewson, financial analyst at AJ Bell, said Friday in comments emailed to The Post. “Fragile is a word that has been used quite a bit to describe the sentiment after a series of central bank rate hikes and a disappointing outlook.”
Earnings season has brought little relief to investors as a tangle of unpredictable economic and geopolitical tensions eat away at corporate results.
“Overall, consumer-facing stocks are under pressure from the cost-of-living crisis and their own budgeting issues,” Hewson said, pointing to Under Armour, whose stock fell more than 23% Friday after the sportswear manufacturer. posted a net loss of nearly $60 million in the first quarter. By comparison, it posted a profit of more than $77 million in the same period last year.
“We continue to meet the needs of athletes in an increasingly uncertain market,” Patrik Frisk, chief executive of Under Armour, said in the company’s earnings report on Friday, citing challenges in the supply chain. supply and “the emerging impacts of covid 19 in China”.
Shares of Adidas also fell 3.8% after the company lowered its 2022 sales forecast, citing Chinese lockdowns and supply chain disruptions. The German sportswear company reported net profit of $327 million in the first quarter, down 38% from 2021.
In Europe, markets closed in the red across the board, with the broader Stoxx 600 index losing 1.9% as the region prepared to pass sanctions targeting Russian oil, including an oil import ban. .
Oil prices rose accordingly, with Brent crude, the international oil benchmark, rising slightly by 1.8% to around $113 a barrel. West Texas Intermediate crude, the U.S. oil benchmark, gained 1.9%, topping $110 a barrel.
Gold, a safe haven for investors in turbulent times, climbed nearly 0.4% to trade at around $1,882 per troy ounce.