Market Update 05/09/22

Katerina Berezovsky

Stocks remained volatile from May 3 to May 9 as investors attempted to navigate the most aggressive U.S. monetary policy tightening in over two decades.

The week began with a modest boost from the major indexes as investors awaited the Federal Reserve’s policy meeting Wednesday. The S&P 500 rose 0.5%, the Nasdaq composite rose 0.2% and the Dow Jones Industrial Average rose 0.2%.

With recent economic data showcasing that inflation has impacted nearly every facet of consumer spending, investors expect an acceleration in the Fed’s monetary policy tightening efforts.

On Wednesday, the Fed announced a rate increase of 50basispoints  . Markets had already anticipated the half-percentage point increase, so the news was slightly anticlimactic. What really helped calm investors’ nerves, however, was Fed Chair Jerome Powell stating that a 75 basis point increase was not in active consideration by the Fed.

“A 75 basis point increase is not something we’re actively considering. I would say I think we have a good chance to have a soft or softish landing, or outcome if you will,” Jerome Powell said during the May 4 policy meeting.

The less hawkish tone in the Fed’s remarks propelled the major indexes to their biggest one-day gain since 2020, despite being down earlier in the trading session. Additionally, Powell’s comments eased selling pressure on Treasuries, with the 10-year Treasury yield dropping from 2.957% to 2.914% on Tuesday.

Nonetheless, Wednesday’s relief rally was quickly reversed on Thursday, with growth stocks getting hit the hardest, as investors realized the challenging environment ahead for stocks.

The sell-off extended into Friday and Monday with the major indexes hitting 2022 lows. By Monday’s close, the Nasdaq plummeted 4.3%, the S&P 500 dropped 3.2% and the Dow fell 2%.

“The market is trying to balance whether central banks are more worried about inflation or about dampening growth and the market has clearly decided they are more worried about inflation,” Altaf Kassam, the head of investment strategy for Europe, the Middle East and Africa at investment management group State Street Global Advisors, told Morningstar.

Like the sell-off seen in stocks, the Treasury market has also been experiencing a wild sell-off that continues to push yields higher. On Friday, the 10-year Treasury yield hit 3.1%, its highest level since November 2018, settling at 3.08% by Monday’s close.

The market volatility and sell-offs that have occurred over the past couple of weeks reflect a contradictory outlook among investors. On the one hand, investors hope that the rate increases will halt the rapidly growing inflation. But on the other, investors worry rate increases will negatively impact economic growth.

This week, investors will look at the April 2022 consumer price index data released by the Bureau of Labor Statistics to see whether inflation has peaked or continues to rise.