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Expectations that the Federal Reserve will delay rate hikes are fading.
Stocks plunged on Monday as investors feared the central bank would raise interest rates by three-quarters of a point next month.
The Dow concluded the day with a drop of over 640 points, or 1.9%, while S&P was down 2.1%, and Nasdaq fell 2.6%.
All 30 Dow stocks fell, and only 25 of the blue-chip S&P 500 index stocks rose Monday.
Stocks also fell on Friday as the market rose for a fourth week in a row. The market recovered in July and August after a disastrous first half of the year. However, the market may go down that path again.
On Monday morning, the CNN Business Fear & Greed Index, which estimates seven impacts of market sentiment, approached fear status. The index slipped to greed levels just a week earlier.
Concerns are growing that the Fed is not done with its mega rate hikes yet. In June and July, the Fed raised interest rates by three quarters of a percentage point, or 75 basis points.
However, investors are starting to see light that the Fed could raise interest rates by half a percentage point in September. This is because new consumer and producer price data suggested inflation eased somewhat over the past month.
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It’s Up to the Fed
The expectation was that inflation was soothing and the economy might be stagnating. But the jobs market continues to be solid and retail sales have propped up considerably well, even with inflation.
That has resulted in market watchers forecasting that the Fed may continue to increase rates rapidly for the foreseeable future. The chance of another 75 basis-point increase versus a half-point hike is now thought to be around 50-50.
“Market expectations for what the Fed will do has a track record of flipping based on economic data,” stated Ally Invest’s Chief Money and Markets Strategist, Lindsey Bell, in a Monday report.
“As long as the Fed is in the driver’s seat, volatility is likely to remain elevated, and the market will remain reactionary.”
Stock volatility is possible all week as investors sit tight for Fed chair Jerome Powell’s highly awaited speech at the Fed’s yearly Jackson Hole symposium in Kansas City on Friday. The Fed’s next interest rate order is not until September 21.
Therefore, much of the economic data, such as the jobs report and inflation numbers for August, lies ahead.
“This has been more like a bull rally in a bear market,” the director of the product strategy at Leverage Shares, Oktay Kavrak, stated regarding the development of the stock market over the past few weeks.
“Recession is still a base case, and inflation remains stubbornly high. This could be one of those years where the market remains choppy.”
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