- The S&P 500 has slumped this week, and is down more than 3% from Monday’s open at the end of Thursday
- This comes as Fed Chairman Jay Powell commented that interest rates could rise higher, and remain high for a long time
- There have been some big individual movers so far this week, with GE down over 6% and SVB Financial Group down over 60% at the time of writing
After opening with a boom on Monday, the stock markets have been in a downward trend for the last few days. No surprise to anyone looking at the reasons behind the decline, given that the key 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 about what might happen at the next Federal Open Market Committee (FOMC) meeting.
On Tuesday, he commented that he may have to raise rates higher and for a longer period of time, saying, “The latest economic data came in stronger than expected, suggesting that the final level of interest rates may be higher than previously thought.” Expected. We stand ready to increase the pace of rate hikes.”
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Why is the Fed raising interest rates?
There’s a big tug-of-war going on in the American economy right now. Inflation is not grabbing as much headlines as it was in 2022, but it is still a serious issue. At an annualized rate of 6.4%, it is well below the June 2022 high of 9.1%, more than double the Fed’s target.
The ideal rate of inflation for Jay Powell is between 2-3%, and he has made it clear on several occasions that he plans to bring it back.
The way the FOMC aims to influence inflation is through interest rates. When the economy starts to overheat and inflation starts to run away, higher interest rates effectively take money out of consumers’ pockets.
Higher rates mean more expensive loans, especially for larger items like mortgages and auto loans. When consumers have to spend more on their mortgage or car payments, that means less cash in their pockets to spend on sneakers or restaurants or gaming.
This slows demand for these goods, with companies forced to limit price increases to keep up with demand. Over time, this brings down the rate of inflation.
Why are high interest rates creating volatility in the market?
That’s all well and good, but high inflation is bad for everyone, right? Surely if the Fed is helping bring down inflation, that would be positive for companies and their stocks?
In the long run, maybe. In the short term, no.
It comes down to the key levers that the Fed is pulling when they raise rates. consumer spending. The higher the interest rates, the lower the expected level of spending. Imagine the average mortgage payment is $1,700 per month.
If the Fed raises rates and it becomes $1,900 per month, that’s $200 less than what the average person has to spend with companies like Nike, Walmart and Amazon.
Not only this, but the higher rates affect business expenses as well. Businesses that use credit (which is nearly all) will have less to spend on their own services, such as office space, new computers and equipment for employees, and even office Christmas parties.
All this adds up to less revenue for the companies. And lower revenue usually means lower profits, which isn’t a good outcome for investors and shareholders.
Because the economy remains strong and inflation remains high, the Fed is likely to continue raising rates.
When Jay Powell makes comments about the rate tightening cycle being higher or longer than expected, it hits the markets as investors worry about how it will affect the bottom line for companies. Could
Other announcements set in motion the markets this week
The other side of this coin is the economic data. In a weird way, good data is actually bad news for the stock market. stay here with us The Fed wants to see some degree of negative economic data.
Fewer jobs or less consumer spending is what they are trying to achieve by raising interest rates. So far, their rate hike doesn’t really seem to make much of a dent on the economy as a whole.
The previous jobs report in January exceeded estimates, with 517,000 jobs added compared to the 187,000 forecast by analysts.
Keeping this in mind, all eyes will be on the February jobs report out on Friday. The consensus forecast pegs the new jobs figure at 205,000, according to data from Refinitiv.
If it comes around this level, we can expect a muted reaction from the markets. A big swing either way can see the market move as much.
If that figure comes in much higher, as it did in January, there will be concern that the Fed will hike rates by 0.50 percentage points, rather than the 0.25 that is currently expected. Markets will not react well to this and we can see further downside.
Big movers so far this week
This week has seen some big movers in both the positive and negative directions so far. Here are some of the biggest changes we’ve seen so far this week.
GE announced market guidance in an investor conference 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 more than 8% in early days. Hours Trading Thursday.
The market hasn’t been kind to Dish Network lately, with the company sitting at a 14-year low. It rebounded from those lows on Tuesday and bounced again Thursday morning on news that Dish co-founder Jim DeFranco had bought an additional $16 million of stock in the company. It is about 5 per cent above Monday’s low.
SVB Financial Group
The parent company of the startup-focused Silicon Valley bank has seen its stock blow up on news of a massive asset sale to shore up its balance sheet. The stock plunged more than 60% in late trading on Thursday.
Markets are waiting on tenterhooks right now for data or news to catch up. Anything that might give some insight into what the Fed will do at its next meeting. One thing is for sure, we are likely to see continued volatility as the battle between inflation, the economy and the Fed continues.
This is unlikely to change until we get some clarity on the direction of the economy and inflation.
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Credit: www.forbes.com /