Look for more pressure to sell next week as investors learn the hard way about not fighting the Fed

Federal Reserve Chairman Jerome Powell adjusts his tie as he arrives to testify before the Senate Banking, Housing and Urban Affairs Committee hearing on the Capitol Hill Washington, D.C., Semi-Annual Monetary Policy Report, July 15, 2021.

Kevin Lamarck Reuters

Wall Street and the Federal Reserve seem to have entered a new reality this week, and the result for investors was large losses with no visible end point.

The S&P 500 is on its way 10th week of decline in the last 11, and is already well in the bear market. On Thursday, all 11 of its sectors closed by more than 10% below their latest highs. The Dow Jones industrial average fell below 30,000 for the first time since January 2021.

However, unlike recent stock cuts, the central bank will not bottom out the market. Instead, the Fed raised interest rates by three-quarters of a percentage point on Wednesday – the largest is from 1994 – and signaled a continuing tightening forward. 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 head.

Bank of America equity strategist Ajay Singh Kapoor said in a note to clients on Friday that it was time for investors to stop fighting the Fed and abandon the immersion buying mentality.

“In the bear market, heroism is punished. Valor is unnecessary, and cowardice is required when building a portfolio – this is the way to save capital and live to fight another day, waiting for the next central bank panic and better estimates and a new profit cycle. ” , wrote Kapoor.

Interest-sensitive technology stocks are particularly hard hit, as are cyclical games such as airlines and cruise lines.

But dramatic declines are not limited to stocks. Bitcoin fell more than 30% in a week against the backdrop of reports of explosions of companies focused on crypto trading. Bond yields, which are moving backwards in bond prices, have risen.

Markets rose briefly on Wednesday afternoon after the Fed’s announcement, but that optimism was quickly shattered and profits reversed on Thursday. Many strategists warn that markets and sentiment may fall further, citing Wall Street earnings forecasts, which curiously still show solid growth next year.

“These people need to fight inflation as fast and as hard as possible. And the market is constantly behind the curve, trying to figure out how aggressive this Fed will be,” said Andrew Smith, chief investment strategist at Delos Capital Advisors.

Recession ahead?

The impact of rising Fed interest rates on the market is exacerbated by deteriorating economic data as investors and strategists appear to be losing confidence in the central bank’s ability to achieve a soft landing.

IN the housing market seems to be cooling rapidlyas the start of housing construction and sharply reduce mortgage applications. Consumer sentiment is at a record low. Unemployment claims are starting to increase as reports of redundancies in technology companies increase. And all oil prices show no signs of falling below $ 100 a barrel with the start of the summer travel season.

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

“Our worst fears about the Fed have been confirmed: they are far behind the curve and are now playing a dangerous game of catching up. “We expect GDP growth to slow to almost zero, inflation to be around 3% and the Fed to raise interest rates above 4%,” Harris wrote.

Even among more optimistic economists, the outlook requires a rather uneven landing. Michael Ferroli of JPMorgan said in a note Friday that he expects Powell to be “largely successful” in balancing the fight against inflation with economic growth, but the recession is a clear possibility.

“This desired soft landing is not guaranteed, and Fed Powell himself has noted that achieving this goal may not be easy. “Even with a tight labor market and an economy struggling with shocks from tighter financial conditions and higher food and energy prices, the risks of a recession are noticeable as we think about the next few years.” “Our models show a 63% chance of a recession in the next two years and an 81% chance of a recession starting in the next three.”

Coming soon

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

The Fed chairman said on Wednesday that he and members of his committee were “absolutely certain“to keep inflation expectations high. The central bank said in a report to Congress on Friday before the hearings that its commitment to price stability is”unconditional. “

Inflation has risen to a leading political as well as economic issue, and the Fed’s increased unemployment forecast may also be subject to scrutiny by lawmakers.

“As they will reach 2.5%, 3.5% [Fed funds rate]”If the economy slows down to a recession, I don’t think they will stand on the back of the economy to bring inflation down,” said Robert Tip, chief investment strategist at PGIM Fixed Income. Otherwise, you will have to lose your job to reduce inflation from 3.5% to 2%. That will be the message: we will have to lose jobs and recession. And I don’t think a compromise will be worth it for them. “

On Friday, investors will receive updated consumer sentiment from the University of Michigan. This measure has already been taken increased significance after Powell cited this week as one of the reasons the Fed decided to raise interest rates this month.

A preliminary reading of the June survey showed record lows for sentiment and confirmation of this number – or even further deterioration – is likely to serve as further evidence that the Fed will not hesitate in the coming months. The part of the survey on inflation expectations that increased in the preliminary reading will be closely monitored.

Outside of these events, next week is relatively light for economic events, with US stock markets closing on Monday, June 16. Investors will look for information about the US economy in earnings reports from several leading stocks, such as Lennar on Tuesday and FedEx on Thursday.

Calendar for the week ahead

Monday

Profits: Kanzhun

The US stock market closed on June 16

Tuesday

Profits: Lenar

8:30 a.m. National Index of the Chicago Fed

10:00 am Sale of existing homes

Wednesday

Profit: Korn Ferry, Winnebago

9:30 a.m.: Fed Chairman Jerome Powell testifies for US Senate Banking Committee

Thursday

Profit: Accenture, FedEx, Restaurants Darden, FactSet Research Systems

8:30 am Applications for the unemployed

10:00 a.m. Fed Chairman Jerome Powell testified U.S. Financial Services Commission

Friday

Profit: CarMax

8:00 am Building permits

10:00 a.m. Michigan Sentiment

10:00 am Sale of a new home

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