Why Did Stocks Drop On Tuesday And What’s Moving Markets This Week?
- The S&P 500 has slid this week, and is down over 3% from Monday’s open in late trading Thursday
- It comes as Fed Chairman Jay Powell has made comments that suggest interest rates could rise higher, and stay high for longer
- There have been some big individual movers so far this week, with GE up over 6% and SVB Financial Group down over 60% at time of writing
After opening higher on Monday, stock markets have been drifting down over the past few days. The reasons behind the fall are no surprise to anyone watching, given that the overriding issue moving the needle right now is interest rates.
Fed Chairman Jay Powell is like an actor in a highly anticipated Marvel movie. Watchers are hanging on his every word, looking for clues and spoilers as to what might be in store at the next Federal Open Market Committee (FOMC) meeting.
On Tuesday, he made comments stating that they may have to raise rates higher, and for longer, saying, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. We would be prepared to increase the pace of rate hikes.”
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Why is the Fed raising interest rates?
There’s a major tug of war going on in the U.S. economy right now. Inflation isn’t hitting the headlines quite as much as it was in 2022, but it’s still a serious issue. At an annual rate of 6.4% it’s come down a lot from its high of 9.1% in June 2022, it’s over double the Fed’s target.
The ideal rate of inflation for Jay Powell is between 2-3%, and he’s made it clear on multiple occasions that this is what he plans to get it back down to.
The way the FOMC aims to influence inflation is through interest rates. When the economy starts to get too hot and inflation starts to run away, higher interest rates effectively take money out of consumers pockets.
Higher rates means more expensive loans, especially for big ticket items like mortgages and auto loans. When consumers have to spend more on their mortgage or car payment, it means less cash in the pocket to spend on sneakers or restaurants or gaming.
That slows demand for these goods, forcing companies to limit the price increases as much as possible to keep demand up. Over time, this brings the inflation rate down.
Why are higher interest rates causing market volatility?
That’s all well and good, but high inflation is bad for everyone, right? Surely if the Fed is helping bring inflation down, that would be a positive for the companies and their stock?
In the long run, probably. In the short term, no.
It comes down to the key lever that the Fed is pulling when they raise rates. Consumer spending. The higher that interest rates go, the lower the expected level of spending. Imagine the average mortgage payment is $1,700 per month.
If the Fed raises rates and this goes to $1,900 per month, that’s $200 less that the average person has to spend with companies like Nike, Walmart, and Amazon.
Not only that, but higher rates impact business spending too. Businesses that use credit (which is almost all of them) will have less to spend on services of their own, such as office space, new computers and equipment for staff and even the office Christmas party.
All of this adds up to less revenue for companies. And less revenue generally means less profit, which is not a good result for investors and shareholders.
Because the economy remains pretty robust right now and inflation remains high, the Fed is likely to continue to raise rates.
When Jay Powell makes comments about the rate tightening cycle being higher or longer than expected, this spooks markets because investors worry about how this might impact the bottom line for companies.
Other announcements moving markets this week
The other side of this coin is economic data. In a weird way, good data is actually bad news for the stock market. Stay with us here. The Fed wants to see somewhat negative economic data.
Fewer jobs or lower consumer spending is exactly what they’re trying to achieve by raising interest rates. So far, their rate hikes haven’t really seemed to make much of a dent on the economy as a whole.
The last jobs report in January came in way above estimates, adding 517,000 jobs compared to the 187,000 that had been forecast by analysts.
With that in mind, all eyes are on the February jobs report which comes out on Friday. According to data from Refinitiv, the consensus forecast has the new jobs figure at 205,000.
If it comes in around this level, we can expect a muted response from markets. A large swing either way could see the market move just as significantly.
If the figure comes in much higher, like it did in January, the concern will be that the Fed will look to hike rates by 0.50 percentage points, rather than the 0.25 that is currently expected. Markets wouldn’t respond kindly to this and we could see a further move downwards.
Big movers so far this week
This week has seen some big movers so far, in both a positive and a negative direction. Here are some of the biggest shifts we’ve seen so far this week.
GE announced market guidance at an investor conference on Thursday morning, stating that they expect to see double digit growth in their aviation business through 2025. This, and a positive outlook for their other business units, has seen the stock jump over 8% in early hours trading Thursday.
Markets have not been kind to Dish Network lately, with the company sitting at a 14 year low. It rebounded from those low levels on Tuesday and bounced again on Thursday morning, on news that Dish co-founder Jim DeFranco had bought an additional $16 million worth of stock in the company. It’s up almost 5% from its Monday low.
SVB Financial Group
The parent company of startup focused Silicon Valley Bank has seen their stock blow up on news of a massive asset sale taking place in order to sure up their balance sheet. The stock crashed over 60% in late hours trading on Thursday.
The bottom line
Markets are waiting on tenterhooks right now to find data or news to latch onto. Anything that might give some insight as to what the Fed will do at their next meeting. One thing is for sure, we’re likely to see continued volatility as the battle between inflation, the economy and the Fed rages on.
This isn’t likely to change until we get some clarity on the direction of the economy and inflation changes too.
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