Fresh off the market’s worst week since June, stocks on Monday struggled to weather their losses as investors eagerly awaited the Federal Reserve’s impending interest rate hike this week – a hike that is brewing to be more aggressive than expected as officials struggle to rein in stubbornly high inflation.
The Dow Jones Industrial Average fell 109 points, or 0.4%, to 30,710 shortly after the market opened, while the tech-heavy S&P 500 and Nasdaq fell 0.4% and 0.3%, respectively.
Oil prices fell more than 2% as recession risks “weighed heavily” on the market, Sevens Report analyst Tom Essaye wrote in a Monday note; the price per barrel of West Texas Intermediate fell to $82 in early trading, approaching its lowest level of the year.
In a weekend note to clients, Goldman Sachs economists updated their forecast for gross domestic product growth to include no growth in the fourth quarter and 1.1% growth next year, from 1. 5% previously planned, due to the possibility of another “exceptionally”. sharp” rate hike this week.
Earlier this month, economists raised their forecast for the Fed to include a 75 basis point hike at Wednesday’s meeting and a one in four chance of a full one point hike, as opposed to the previously forecast half-point increase.
Even though Fed Chairman Jerome Powell has argued for a slower pace of tightening after the last hike in June, Fed officials have “appeared hawkish lately” and “appeared to imply that progress towards inflation control have not been as fast as they would like,” the team explained.
The market suffered its worst performance in months last week after the Labor Department announced that inflation had risen more sharply than expected in August, fueling concerns that Fed officials may have to act more aggressively to stifle inflation. The S&P is down 10% from its August peak and has plunged 19% this year. “The summer rally is over,” Bank of America’s Savita Subramanian wrote in a recent note, predicting the S&P will fall another 8% by year-end. Meanwhile, the Nasdaq is down 28% this year.
“The Fed still has work to do,” Subramanian said in a weekend note. “A hawkish Fed may be anathema to stocks that have benefited from low rates and disinflation (i.e. most of the S&P 500), but lessons from the 1970s tell us that premature easing could lead to a new wave of inflation – and that short-term market volatility may be a lower price to pay.” Consumer prices rose 8.3% in the 12 months to August, slowing for a second month in a row (largely thanks to lower gasoline prices), but still more than the rise 8% that economists had predicted.
As investors weigh the prospect of bigger interest rate hikes, 10-year Treasury yields hit 3.518% this morning, the highest level in 11 years.
Dow down 100 points as shaken investors close worst week since June (Forbes)
Here’s what happens to stocks when the Fed raises rates by 100 basis points (Forbes)
Recession watch: Stock market rally ‘over’ as unemployment starts to rise and fears escalate (Forbes)