Wall Street had its work week for nearly 4 months. This happened right after the Federal Reserve hinted that the US central bank was aware of budding inflationary pressures.
This Friday, S&P 500 dropped 1.3%, taking its losses for the week to 1.9%. Roughly 90% of the stocks in the blue-chip index were lower on the day, including shares of big banks and US oil majors.
The small-cap Russell 2000 index also recorded its heaviest weekly loss since late January, falling more than 4%.
Jay Powell, Fed chair, made a comment on Wednesday that investors took as a signal that the US central bank would act to tame inflation and that policy makers were not solely focused on aiding the country’s hard-hit labour market.
The comment also indicated that the projected interest rate rise would happen in 2023, instead of an earlier forecast of 2024. This view was further reinforced by an interview of James Bullard, president of the St Louis Fed, where he said the first rate rise could come in 2022.
Inflation expectations have been dramatically marked down this week as investors digested the latest Fed decision. For growth stocks, however, this is not necessarily bad news. Nasdaq, where most growth technology stocks reside, only fell 0.3% for the week. And this is consistent with continued equity resilience.
The equity declines accompanied a rally in long-term US government bond price on Friday as investors viewed the earlier-than-expected projections of a US rate rise as a signal of the central bank’s willingness to control inflation.
The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, was 0.06% points lower at 1.44%.
This yield has climbed from about 0.9% at the start of the year but has moderated in recent months as investors have come to view leaps in US inflation as temporary. (Persistent inflation erodes the fixed-interest returns on bonds.)
Equity markets are anticipating the Fed tightening sooner, which could dampen economic growth, hence the drop in the 10-year treasury yield, and a rotation away from the pandemic reopening trade and towards more secular growth parts of the stock market such as tech.
The dollar also enjoyed its best week since April 2020 as yields on short-term Treasuries rose, pricing in future expected rate rises. The dollar index, which measures the greenback against big currencies, rose 0.4% on Friday, taking its weekly gain to 1.9%.
The trends are changing. Trade safely.