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Dow falls over 500 points, S&P 500 down 1.7% as investors question Fed’s pivot thesis

Dow falls over 500 points, S&P 500 down 1.7% as investors question Fed's pivot thesis
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US stocks fell on Monday on concerns that the recent rally was based on an overly optimistic view of the Federal Reserve’s potential to move away from using sharply higher interest rates to fight inflation.

How are stocks traded?
  • The S&P 500
    SPX

    fell 71 points, or 1.7%, to 4,156.

  • The Dow Jones Industrial Average
    DJIA

    lost 510 points or 1.5% to 33,197.

  • The Nasdaq Composite
    COMP

    fell 260 points, or 2.1%, to 12,445.

Last week, the Dow Jones Industrial Average declined 54.31 points, or 0.2%, to 33,706.74. The S&P 500 closed up 51.67 points, or 1.2%, at 4,228.48 for the week, while the Nasdaq Composite fell 341.97 points, or 2.6%, at 12,705.22. On Friday, the Nasdaq Composite rose 19.3% from its mid-June low, but is still down 18.8% to date.

What moves the markets?

Wall Street was on course for massive declines as investors raised concerns about a range of monetary, technical and seasonal factors.

The benchmark S&P 500 index had rallied sharply from its mid-June low, in part on hopes that evidence of peak inflation would allow the Fed to slow the pace of rate hikes and even switch to a dovish stance next year.

However, that assumption was questioned last week by a number of Fed officials who appeared to warn traders against adopting a less restrictive monetary policy narrative. Central bankers will gather in Jackson Hole this week for their annual retreatWyo., and Federal Reserve Chair Jerome Powell are expected to deliver a much-anticipated speech on the economic outlook.

“Markets are too complacent about the outstanding risks to the macroeconomic environment,” said Michael Reynolds, vice president of investment strategy at Glenmede, which manages $45 billion in assets from its Philadelphia office. “We see the risk of recession at 50% over the next 12 months, maybe even higher. Based on our position, the market looks a little overheated given these valuations and we remain underweight equities.”

“Income risk is the most important thing for investors and that’s where there is downside risk for markets,” Reynolds said by phone Monday.

According to Reynolds, Powell’s Jackson Hole speech on Friday will be a “double-edged sword” for markets, giving traders and investors more certainty about the path of interest rates and the need to adjust their expectations. “Markets are underestimating how much the Fed will have to tighten and how high interest rates will have to stay to bring inflation back under control. The market has to put up with how hard the Fed has to tighten here. Part of what we’re expecting from Jackson Hole is Powell coming out pretty strong saying the Fed will tighten even if it risks a recession. It’s sobering news that could lead to more risk-off moves.”

See: Here are 5 reasons why the bull run in stocks could turn back into a bear market

Falling bond yields earlier this summer helped stocks in their recent rally. But after the 10-year yield fell below 2.6% in early August
BX:TMUBMUSD10Y

is again above 3%.

Another issue worrying the bulls is the failure of the S&P 500 to break through a key technical level, raising fears that the market remains in a downtrend. According to Dow Jones Market Data, the large-cap index is on track for its second consecutive loss of 1% or more, the longest streak of this kind since the four trading days ended June 13.

Source: Guggenheim

“We see concerns that the Federal Reserve is or will continue to act aggressively by raising interest rates and dragging equities lower,” said Fiona Cincotta, senior financial markets analyst at City Index in London. “The market has this realization that the Fed isn’t likely to have a dovish turn any time soon, even though there was a weaker inflation readout a couple of weeks ago.”

“Powell’s speech will be the key event this week, but the market isn’t really expecting a dovish change from the Fed anymore, so we’re seeing stocks under pressure and the dollar recovering,” she said over the phone. Now that the S&P 500 has dropped below 4,180, Cincotta says that opens the door for the index to drop further to 4,100 or 3,970.

See: Once offering the worst yield on Wall Street, cash now appears to be the best asset to own, says Morgan Stanley

The Dollar Index
DXY

is back near 20-year highs as worries about the European economy drag on the euro amid rising energy prices
EUR USD

the below parity with the dollar. A strong dollar is associated with weaker stocks because it eats away at American multinationals’ overseas earnings by making them worth less in US dollars.

Which companies were the focus?
  • shares of AMC Entertainment Holdings
    AMC

    declined 0.2% as did the company’s new preferred class began trading under the ticker ‘APE’.

  • mean health
    SGFY

    Shares rose nearly 32% after a Wall Street Journal report say Amazon.com Inc. is among several companies bidding for home healthcare provider. The healthcare company is said to be up for sale in an auction that could be worth more than $8 billion, according to The Wall Street Journal, citing people familiar with the matter.

  • Travel stocks went down with cruise stocks such as Carnival Corporation
    CCL,
    Royal Caribbean Group
    RCL

    and Norwegian Cruise Line holdings
    NCLH

    decreased by around 4% each.

How are other assets doing?
  • The 10-year Treasury yield
    BX:TMUBMUSD10Y

    rose 4 basis points to 3.02%.

  • The general risk aversion in the market affects most asset classes. oil futures
    CL

    were lower, with US Crude Oil falling 0.9% to $89.97 a barrel.

  • gold futures
    GCZ22

    December delivery fell $12.90, or 0.8%, to $1,750 an ounce as the rising dollar and higher Treasury yields continued to weigh on precious metals.

  • The ICE US Dollar Index
    DXY,

    a gauge of the dollar’s strength against a basket of rivals, rose 0.7% to 108.89, beating a multi-decade high set last month.

  • Bitcoin
    BTCUSD

    fell 0.9% to $21,328.

  • In Europe, the stock index Stoxx 600
    XX: SXX

    ended down 1% as the UK equity market benchmark FTSE 100
    Z00

    0.2% lower closed. In Asia, most bourses were also lower, although China’s Shanghai Composite
    CN:SHCOMP

    Bucking the trend, it closed down 0.6% after the country’s central bank trimmed mortgage rates to support the ailing real estate sector.

— Jamie Chisholm contributed to this article.

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