On May 5, local time, panic selling emerged in the U.S. stock market, with the three major stock indexes completely giving back their gains from the previous day. The Dow fell nearly 1,400 points during the session.
As of the close, the S&P 500 fell 3.56% to 4146.87 points; the Nasdaq fell 4.99% to 12317.69 points; the Dow Jones fell 3.12% to 12317.69 points 32997.97 points. Both the Dow and Nasdaq posted their biggest one-day losses since 2020. This is also the biggest reversal in the U.S. stock market since the epidemic – the largest one-day drop in the Dow one day after the largest one-day gain since 2020.
The market view believes that investors’ concerns about the economy falling into stagflation or even recession are the main reasons for the sharp turnaround in the market.
Inflation and Recession Concerns
The U.S. is suffering from the highest level of inflation in 40 years. The latest data released on May 5 showed that the initial value of non-farm productivity in the United States fell by 7.5% in the first quarter, the largest decline since 1947. Labor costs have soared as the economy shrinks, signaling an extremely tight job market.
On May 4, the Federal Reserve announced its decision to raise the federal funds rate range to a range of 0.75%-1.00%, the first substantial rate hike since 2000 by 50 basis points; in June On the 1st, the balance sheet was reduced at a pace of US$47.5 billion per month, and the upper limit of the reduction of the balance sheet was gradually increased to US$95 billion per month within three months.
Federal Reserve Chairman Powell also hinted at a press conference that he ruled out the possibility of a follow-up rate hike of 75 basis points, which boosted market sentiment for a time.
Invesco Asia Pacific (ex-Japan) global market strategist Zhao Yaoting pointed out that the FOMC decision and Powell’s forward rate hike guidance show that the Fed is responding to high Inflation levels continue to attempt to achieve a soft landing. For the rest of the year, the Fed will continue to target a neutral policy rate as soon as possible, in line with current market expectations. The risk is primarily a further upside in yields, with U.S. and Asia-Pacific equities likely to continue to experience some volatility given the tightening environment. Global markets have so far largely taken the tightening in stride, and U.S. bonds have so far faced more volatility.
Powell repeatedly emphasized on May 4 that the U.S. economy is still resilient, and he does not believe thatA recession is something that happens automatically when monetary policy is tightened, noting that the U.S. “has a good chance of a soft landing.” Between controlling inflation and a recession, the Fed will still keep inflation in check as its top priority right now.
But the market doesn’t seem to believe Powell’s claims.
“The Wall Street Journal” pointed out that given that the US inflation rate is at the highest level since the early 1980s, the market had expected the Federal Reserve to take a larger interest rate hike. And the prospect of slower rate hikes set off a frenzy of buying in the second half of Wednesday afternoon. But Thursday’s decline dashed those optimism. Thursday’s rout was another example of market volatility this year, underscoring jitters over the potential impact of the Federal Reserve’s move to raise interest rates.
“The U.S. Treasury yield curve is steepening, which tells you the Fed isn’t doing enough. Long-term Treasury yields could climb toward this year’s highs, trying to send a message to Powell “That’s why we still believe that after each Fed meeting, the real market moves don’t start until about 18 hours after the policy announcement,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.
Ian Lyngen, head of U.S. rates strategy at Bank of Montreal (BMO) CapitalMarkets in Canada, believes that the market’s message on May 5 was clear and loud—that a rate hike could trigger the economy risk of recession. U.S. Treasury yields soared as stocks fell, a sign that bond markets no longer believe the Fed can give the economy a “soft landing” while continuing to tighten policy to fight inflation.
“The Fed’s approach has resulted in less liquidity and more volatility in the market, so until the Fed gets inflation under control and changes policy, this may be our new normal for a while ,” said John Ingram, chief investment officer and partner at Crestwood Advisors.
Even though there may be no further rate hikes in the coming months, investors still face the biggest tightening of U.S. monetary policy since 2000. The last time the Fed raised rates by half a percentage point was in 2000. While many investors say the market conditions were very different then, when market valuations were higher and the long-term business prospects of many fast-rising Internet companies were uncertain, they did not forget that the major stock indexes ended the year with sharp losses.
Many investors are now questioning how high the Fed is likely to raise interest rates over the next two years amid soaring inflation, and how that might affect the broader economy and corporate profits.
“It’s like when we’re all on medication, the drug has to build up in the body’s system to have an effect, and there’s always a lag in the impact of the Fed raising the federal funds rate. ” said Tim Horan, co-chief investment officer, fixed income, ChiltonTrust.
Also, many investors are concerned that the Federal Reserve could raise interest rates in the next two years amid soaring inflation How high will it go, and what impact this might have on the economy and corporate profits.
For now, Wall Street believes the Federal Reserve remains steadfast in raising interest rates above neutral. Being “open” to controlling inflation means the Fed wants to see continued tightening of financial conditions, which would hit high-valued tech and growth stocks significantly.
A bear market just started?
In fact, 2022 will be the most painful year for bargain hunters in decades. Since January, the S&P 500 has averaged 2.3 days of declines, more than in any year since 1984, while returns after declines have been negative 0.2%. It was the worst in 35 years.
Wall Street’s big bear, David Wright, believes that this bear market has just begun, “macroeconomic and geopolitical turmoil is worrying investors. The world No other country is betting so much wealth on stocks. We are at the peak of our complacency, and we are in the midst of the biggest bear market of our life right now, and the bear market has just started, and there is a big wave to come.”
Jim Paulsen, chief investment strategist at investment research firm Leuthold Group and one of Wall Street’s most prestigious bulls, put it bluntly: “I’m as scared as everyone else…I’m already in this The industry has been in business for almost 40 years, and it’s getting worse. Because you can’t be sure of the future, and you know the past was wrong.”
“It’s hard for us to judge who will be the massive buyers of the stock market in the coming weeks.” Viraj Pat, global macro strategist at Vanda Researchc”It’s a game of waiting for the catalysts…you need more confidence from the data that either shows inflation has peaked or the economy is slowing and the Fed doesn’t need to be so aggressive,” el said. br>
The May 4 rally was “a sign of a bear market rally,” according to Greg Boutle, U.S. head of equity and derivatives strategy at BNP Paribas.
“Positions have been very defensive in this move, which may somewhat lessen the feeling of panic or forced selling,” Boutle said, “but for now It’s hard not to be interpreted as problematic in a very short period of time.”
Mike Wilson, chief U.S. equity strategist at Morgan Stanley, also believes that the current The bear market is far from over. The S&P 500 is at least down to 3,800 in the near term, and possibly as low as the 200-week moving average of 3,460 if earnings per share over the next 12 months start to decline due to margins or recession fears.
The GAIN team turned neutral on the short-term tactical bearish bias on the S&P 500. One is that the S&P 500 hit the bottom of its recent range on April 11, and the other is that bearish sentiment has reached extreme levels. “We’re still leaning toward a short-covering rally that re-sells at the top of the index’s range around 4,600. Rising rates are even more detrimental to the Nasdaq.”