It’s been a rough week for the stock market, but the major indexes are clawing their way back up Friday morning. The Nasdaq Composite and S&P 500 indexes clawed back up 1% Friday morning, representing an attempt to regain some lost ground. The Dow Jones scored back 150 points early Friday, though all three are still on track for steep weekly losses.
These encouraging jumps came after Federal Reserve Chair Jerome Powell told reporters that the central bank was not “seriously considering” any 75 basis point interest rate hikes. The Fed is still on track to implement at least two more 50-point hikes in 2022, though April’s Consumer Price Index showed the central bank’s first hike in March hasn’t moved the needle on inflation. Many investors feared this red-hot inflation print would convince the Fed to move more aggressively in its market-tightening policy to get the dollar back on track.
Thursday, the S&P 500 closed nearly 20% down from a recent high. This pattern is a formal bear market, marked by deep investor uncertainty. Bear markets usually presage economic recessions, so the pattern was a hot topic among analysts this week. Many economists still believe the combination of roaring inflation, global shipping disruptions, and the war in Ukraine will cause a recession in the US before the end of the year.
It’s All About Inflation
Market analysts continue to watch US inflation, which is increasing prices for American workers across the economy. No segment of the market has been spared: if an item needs to travel to a store on the back of a truck, it has increased in price. “Inflation has certainly become not only topical, but a real issue for the broader market, as the Fed has also increased its outlook for the number of [interest rate] hikes needed,” Pimco managing director and portfolio manager Sonali Pier explained to reporters.
“In terms of the effect of inflation, it’s really at this point, we’re going to see if the Fed raising rates, unwinding some of the balance sheet, can take off some of that inflation froth. Because it’s quite high, and it’s starting to impact companies — from their ability to push through from a pricing power perspective, as well as consumers, whether that’s at the gas pump or as a result of food increases and the like.”
Pier’s statement regarding corporate impact is evident in this month’s recent revenue disclosures. Companies have struggled to keep up with expectations in the first quarter of 2022, with soaring transportation and labor costs eating into their bottom lines. Most of these companies have chosen to pass the higher costs along to their customers, which is souring some consumers in the US.
Why is the Fed’s Tightening Plan Bad for Stocks?
While customers love to see the central bank taking steps to bring prices down, it’s not something investors enjoy dealing with. “We’re in an environment right now where inflation is high. The labor market is very tight. The Fed wants to bring inflation down. They want to sort of cool the overheating in the labor market, which means their bias is to tighten financial conditions and try and slow growth,” explains UBS’s Head of Asset Allocation, Jason Draho. “In that environment, it’s not great for any sort of financial assets.”
When the economy slows down, corporate stocks sink and Treasury bonds soar. Risk-averse investors rearrange their portfolios to focus on “sure-thing” long-term investments and leave riskier tech stocks alone. This can further complicate issues for companies that rely on investor capital to drum up funds for their business ventures.
This risk-averse attitude is also hammering the cryptocurrency industry. Coinbase’s stock has fallen dramatically in the past week, and other exchange platforms are panicking. Bitcoin is trading under $29,000, while Ethereum is down to just $1,900.
Lawmakers Weigh FTX Proposal
Crypto exchange company FTX has proposed a new automatic collateral system that would automatically calculate margin requirements for crypto trades on its platform. This could streamline the process of trading digital coins, but it also would encourage healthy markets, according to FTX CEO Sam Bankman-Fried. Bankman-Fried testified to Congress yesterday regarding the new system.
“It would bring competition and innovation,” the CEO told lawmakers. “It would bring liquidity to the U.S. marketplace and options to U.S. consumers. It would bring competition in futures market where all of volume is created by just two exchanges and would bring competition to U.S. with regard to the rest of the world.”
Some lawmakers seemed skeptical regarding the program, and another panel witness, CME Group CEO Terry Duffy, decried it as a “cost-cutting measure” for FTX. Lawmakers are now considering FTX’s proposal and are expected to make a final decision on May 25. However, if crypto-assets keep tanking at their current rate, the decision might be a moot point by the end of the month.