A more hawkish Fed. Bearish investors. Dollar bulls. That combination is pushing the S&P 500 precariously close to correction territory, where it would join the floundering Nasdaq.
At 4:30 a.m. ET, futures contracts tied to the benchmark index were flat in a volatile premarket trading session. The S&P is less than 1% from a dreaded correction, or a fall of 10% from its previous high. Investors haven’t seen such a selloff since March 2020, at the height of the pandemic. Meanwhile, the tech-heavy Nasdaq is down 14.5% year to date.
“We know why this is happening,” writes Ryan Detrick, chief market strategist at LPL Financial. “The market is repricing risk with the realization that rate hikes are coming, likely as many as four hikes this year are being priced into the equation. Add on the continued supply-chain issues, shortages, inflation, and a slowing economy due to the Omicron variant, and you have many reasons to think stocks could be down.”
The S&P actually briefly sunk into a correction on Tuesday before rebounding; it closed yesterday down 9.3% off its Jan. 3 close—barely over three weeks ago.
According to LPL, this has been one of the worst starts to the year for the benchmark index. On an intraday level, it took just 15 trading sessions to sink 10%—not quite as bad as what we saw during the global financial crisis, but still pretty unnerving for investors.
On Wednesday, Federal Reserve chairman Jerome Powell surprised investors with an even more bullish forecast for rate hikes and for trimming the central bank’s balance sheet. Wall Street had been anticipating four rate hikes this year, but now some in the markets are pricing in a fifth, and a 0.5% increase at the next FOMC meeting in March.
That increased timeline for hikes took the air out of the markets yesterday with risk-assets plunging across the board. According to Deutsche Bank, the Nasdaq suffered a 4.36% intraday swing from being solidly in the green to close virtually flat. Just two S&P sectors—financials and tech—finished higher on Wednesday, and just barely.
The Fed moves hit the overseas markets hard this morning. Asian stocks were getting battered, with Japan’s Nikkei off more than 3% in late afternoon trading. The European bourses all dropped at the open. Bank stocks made up the lone sector on the benchmark Euro Stoxx 600 in the green.
A more hawkish Fed is also sending ripples through the FX markets. The dollar soared on Wednesday, in line with yields on long-dated Treasuries. A strong dollar could be yet another warning sign for investors as multinationals’ profits from abroad come under pressure.
In the short term, analysts see the dollar strengthening further as investors push into safe-haven assets and geopolitical uncertainties in Europe, particularly over the prospect of war in Ukraine. “We remain bullish USD,” BofA Securities FX team wrote in a summary of yesterday’s FOMC meeting.
Risk assets across the board were in trouble. The crypto price board, too, was a blur of red. Bitcoin fell below $37,000, more than erasing yesterday’s gains.
There have long been concerns that a more hawkish Fed is bad news for crypto bulls.
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