Look for more selling pressure in the coming week as investors learn the hard way not to fight the Fed

Federal Reserve Chairman Jerome Powell adjusts his tie to testify before the Senate Banking, Housing and Urban Affairs Committee for a hearing on the “half-annual monetary policy report to Congress” on Capitol Hill on July 15, 2021 in Washington.

Kevin Lamarck | Reuters

Wall Street and the Federal Reserve appeared to be entering a new reality this week, and consequences for investors with big losses with no clear end point in sight.

The S&P 500 posted its last 11. 10th week down in, and now is well into a bear market. All its 11 sectors closed down more than 10 per cent from their recent highs on Thursday. The Dow Jones Industrial Average last week fell below 30,000 for the first time since January 2021.

Unlike the recent declines for stocks, however, the central bank will not put the market down. Instead, the Fed raised interest rates by three-quarters of a percent on Wednesday. It is the largest since 1994 – and indicated further tightening. Chair Jerome Powell will testify before Congress next week and is expected to stick to his plan for a more aggressive Fed until inflation is brought to a peak.

It is time for investors to stop fighting the Fed and drop the buy-the-dip mentality, Bank of America equity strategist Ajay Singh Kapur said in a note to clients on Friday.

“In a bear market, heroism is punished. Valor is unnecessary, and in portfolio building called cowardice – it is the way to preserve capital and live to fight another day, waiting for the next central bank panic. doing, and better valuations and a new earnings upcycle,” wrote Kapoor.

Tech stocks, which are sensitive to interest rates, have been particularly hard hit, as have cyclical plays such as airline and cruise lines.

But the dramatic decline isn’t limited to stocks. Bitcoin drops more than 30% in a week Amidst the news of the explosions of crypto-focused trading firms. Treasury yields have risen in contrast to bond prices.

Markets rose slightly on Wednesday afternoon following the Fed’s announcement, but that optimism was quickly dashed and gains were reversed on Thursday. Many strategists are warning that market sentiment could slide further, with Wall Street earnings forecasts still showing solid growth in the year ahead.

“These guys need to fight inflation as quickly and as much as possible. And the market is constantly trying to figure out how aggressive this Fed will be,” said Andrew Smith, chief investment strategist at Delos Capital. Advisor.

Further recession?

The impact of the Fed’s rate hike on the market is exacerbated by deteriorating economic data, as confidence in investors and strategists appears to be waning. Central bank’s ability to achieve soft landing,

The housing market seems to be rapidly cooling downWith housing launches and mortgage applications declining. Consumer sentiment plumbing is at a record low, As news of layoffs at tech firms rises, jobless claims are starting to get higher. And all oil prices show no sign of falling below $100 a barrel as the summer travel season begins.

In a note to customers on Friday, Bank of America global economist Ethan Harris described the US economy as “a reversal away from recession”.

“Our worst fears around the Fed have been confirmed: They fell behind the curve and are now playing a dangerous game of catch-up. We see GDP growth at nearly zero, inflation at nearly 3% and the Fed at nearly 3%. Let’s look to settle on the %. Increase the rates above 4%,” Harris wrote.

Even among more optimistic economists, the outlook calls for a bumpy landing. JPMorgan’s Michael Feroli said in a note Friday that he expects Powell to be “substantially successful” in fighting inflation with economic growth, but a recession is a distinct possibility.

“This desired soft landing is not guaranteed, and Fed Chairman Powell himself has noted that achieving this goal may not be entirely straightforward. And with a tight labor market and economy in tight financial conditions and high food and energy consumption, there is a need to ensure that this is not the case.” With energy price shocks dealt with, the risks of a recession are notable as we think about the next few years,” Feroli wrote. “Our models indicate a 63% chance of a recession over the next two years and an 81% odds that the recession starts in the next three.”

is coming

Powell will be in the hot seat again next week as he returns to Capitol Hill to testify before both houses of Congress, and his stance is unlikely to soften over the weekend.

The Fed chair said on Wednesday that he and his committee members were “absolutely determined“To prevent inflation expectations from rising. It has a commitment to price stability,” the central bank said in a report to Congress on Friday ahead of the hearing.unconditional,

Inflation has risen to a top political issue as well as an economic one, and the Fed’s raised forecast for unemployment could also come under the scrutiny of lawmakers.

“As they’re going to 2.5%, 3.5% [Fed funds rate]”If the economy is slowing towards a recession, I don’t think they’re going to stand on the cusp of the economy turning down inflation,” said Robert Tip, chief investment strategist at PGIM Fixed Income. .. .otherwise, to reduce inflation from 3.5% to 2%, you will lose your job. The message is going to be: We’re going to face some job losses and a recession. And I don’t think the settlement is going to be worth it for them.”

On Friday, investors will get an updated consumer sentiment reading from the University of Michigan. that solution is gone now increased importance One reason the Fed decided to hike its rates this month came after Powell pointed it out this week.

Preliminary readings of the survey for June showed a record low for sentiment, and a confirmation of that number – or a further decline – will likely serve as further evidence that the Fed will not waver in the coming months. The inflation expectations portion of the survey, which rose in the initial reading, will be watched closely.

Outside of those events, next week is relatively light for economic events, with US stock markets closing for Juneteenth on Monday. Investors looking for insight into the US economy will seek out earnings reports from certain Belvedere stocks, such as Lenar on Tuesday and FedEx on Thursday.

week ahead calendar

monday

Earnings: Kanjunu

US stock market closed for Juneteenth

Tuesday

Earnings: lenar

8:30 AM Chicago Fed National Activity Index

10:00 AM Current Home Sales

Wednesday

revenue, Korn Ferry, winnebago

9:30 am: Fed Chair Jerome Powell testifies US Senate Banking Committee

Thursday

revenue, Accenture, fedex, Darden Restaurant, FactSet Research Systems

Jobless claims at 8:30 am

10:00 a.m. Fed Chair Jerome Powell testifies US House Committee on Financial Services

Friday

revenue, Carmax

Building permit at 8:00 am

10:00 AM Michigan Sentiment

10:00 AM New Home Sale