Dow Falls 400 Points As Fed Readies Another Interest Rate Hike—Fueling Extreme Investor Bearishness

view original post

Topline

Stocks fell in early trading Tuesday as Federal Reserve officials kicked off their long-awaited policy meeting, which is expected to conclude on Wednesday with the third consecutive 75-basis-point interest rate hike—an aggressive move that would push borrowing costs to the highest level since the Great Recession in an attempt to ease stubbornly high inflation.

Key Facts

The Dow Jones Industrial Average fell 380 points, or 1.2%, to 30,640 by 10:30 a.m. EDT, while the S&P 500 and tech-heavy Nasdaq shed 1.2% and 0.9%, respectively.

Economists project Fed officials will raise interest rates by another 75 basis points on Wednesday, surpassing previous expectations of a half-point hike after last month’s inflation print came in surprisingly hot and pushing borrowing costs up to between 3% and 3.25%—the highest level since 2008.

Reflecting expectations for bigger interest rate hikes, yields on the ten-year Treasury hit 3.593% on Tuesday, hitting the highest level in 11 years for a second day straight.

In a note to clients, Keith Lerner, chief market strategist at Truist Advisory Services, said he expects the Fed will likely keep interest rates elevated for longer in order to offset the inflation challenges that have lingered for more than a year—“even if it requires more economic pain,” as officials have warned this summer.

Lerner points out that fund managers surveyed by Bank of America are showing signs of extreme bearishness, piling up on cash at the highest level since 2001 and limiting exposure to stocks (at record low levels) as global economic growth expectations near an all-time low in light of central bank tightening efforts.

Crucial Quote

“The biggest and growing downside risk for the market is increasing recession risk as the Fed aggressively tightens into a slowing economy,” says Lerner. “Historically, once inflation exceeded 5%, it has generally taken a recession to bring it back down.” That’s consistently been the case since at least 1970.

What To Watch For

The Fed will announce its next interest-rate hike at the conclusion of its two-day policy meeting, Wednesday at 2 p.m. EDT.

Key Background

The market had its worst showing in months last week after the Labor Department reported inflation rose more sharply than expected in August, fueling concerns that Fed officials may need to act more aggressively in order to quell inflation. The S&P is down 10% since its peak in August and has plunged nearly 20% this year. “The Fed has more work to do,” Bank of America’s Savita Subramanian wrote in a recent note. “Lessons from the 1970s tell us that premature easing could result in a fresh wave of inflation—and that market volatility in the short run may be a smaller price to pay.”

Further Reading

Stocks Struggle As Markets Brace For Another ‘Unusually Large’ Fed Rate Hike (Forbes)

Here’s What Happens To Stocks When The Fed Raises Rates By 100 Basis Points (Forbes)

Recession Watch: Stock Market Rally ‘Is Over’ As Unemployment Starts Rising And Fears Intensify (Forbes)