Stocks fell sharply again this morning as momentum shifted further toward bears. The Dow, S&P, and Nasdaq Composite all tumbled, led lower by sagging tech shares.
Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Google-parent Alphabet (NASDAQ: GOOG) suffered losses that outpaced the general market. Semiconductor stocks plunged as well.
It’s clear that the market is anxious about the Fed’s upcoming summit at Jackson Hole. Or, more specifically, Fed Chairman Jerome Powell’s speech at the summit, set to be delivered this Friday.
This year’s theme at the Fed’s summer pow-wow is “reassessing constraints on the economy and policy.”
Investors are worried – and rightfully so – that Powell will push back strongly against the narrative that the Fed pivoted to a more dovish stance following the July FOMC meeting.
Late last week, Fed officials (Bullard and Barkin) got the selling started with a series of very hawkish interviews. Barkin, who serves as the Richmond Fed President, even went so far as to say that the rate hikes should be front-loaded.
This rattled bulls as it implied that a rate hike greater than 75 basis points could be coming in September. Following the July FOMC meeting, investors began pricing in an increase of just 50 basis points, driving stocks higher.
Then, last week, yields soared in response to Bullard and Barkin’s comments. The market turned on a dime and priced in a 75 basis point hike, fueling a selloff that continued into today’s trading session as yields climbed higher still.
The 10-year Treasury yield, for example, notched a new 30-day high this morning. That’s why rate-sensitive tech stocks led the market lower.
Analysts offered a myriad of takes on what would happen this Friday when Powell speaks.
“When you see the market right now dropping down like this, this is the market saying the Fed has to be more aggressive to slow the economy down further if they’re going to have any chance at bringing inflation back,” said Upholdings portfolio manager Robert Cantwell.
Most strategists think a major hawkish shift is on its way. Wells Fargo’s Michael Schumacher broke rank in a note to clients this morning.
“I’m not convinced he’s going to pull out the talons and sound hawkish. I think the fear is he’s going to be hawkish,” Schumacher said.
He’s absolutely right in that the fear of a hawkish Powell is enough to crush the market, which enjoyed a dizzying rally that started in late July. Stocks had virtually no major bearish events to react to over the last four weeks prior to Barkin and Bullard’s interviews.
It was all bullish news. So, even the prospect of a hawkish (ie, bearish) shift from Powell had bulls running scared.
Keep in mind also that the S&P just crossed the 10-day moving average Friday and the 50-day moving average this morning.
The last three times this happened following a rally of significance (>8.00%), the broader market index cratered in the trading sessions that followed, setting a lower low on each occasion.
That’s not to say we’ll see new yearly lows for the market in the coming weeks, but it’s certainly an inauspicious sign, especially as Powell’s Jackson Hole speech draws closer with each passing day, providing traders with a potentially “sellable” moment.
