Dow falls more than 600 points, S&P 500 loses 2.1% as investors question Fed’s keynote

What drives the markets?

Wall Street was on course for sharp declines as investors expressed caution over a series of monetary, technical and seasonal factors.

Until recent days, the benchmark S&P 500 had rallied sharply from its lows since mid-June, partly on hopes that indications of peak inflation would allow the Fed to slow the pace of rate hikes and even pivot to a downward trajectory next year.

However, that assumption was challenged last week by a series of Fed officials who appeared to caution traders against adopting a less hawkish narrative on monetary policy. Central bankers will gather this week for their annual meeting in Jackson HoleWyo., and Federal Reserve Chairman Jerome Powell is expected to deliver a much-anticipated speech on the economic outlook.

“Markets have been too complacent about the big risks to the macroeconomic environment,” said Michael Reynolds, vice president of investment strategy at Glenmede, which oversees $45 billion in assets out of Philadelphia. “We see the risk of a recession at 50%, maybe higher than that in the next 12 months. Based on where we sit, the market seems a little overheated at these valuations and we continue to be an undervalued stock.”

“Earnings risk is what matters most to investors, and there is downside risk to the markets here,” Reynolds said by phone on Monday.

Powell’s speech in Jackson Hole on Friday will be a “double-edged sword” for markets, giving traders and investors more certainty on the path to interest rates, along with the need to adjust their expectations, according to Reynolds. “Markets are underestimating how much the Fed needs to tighten and how high interest rates need to stay to bring inflation back under control. The market needs to come to terms with how hard the Fed should tighten here. Part of what we expect from Jackson Hole is for Powell to come out pretty strong and say the Fed will tighten even if there is a risk of a recession. This is a sobering message that could lead to further risky moves.”

Look: Here are 5 reasons why stocks’ rally may be about to turn into a bear market again

Falling bond yields earlier this summer helped support stocks in their recent rally. But after falling below 2.6% in early August, the 10-year yield
TMUBMUSD10Y,
3.033%

it is again above 3%.

Another issue worrying the bulls is the failure of the S&P 500 to break a key technical level, raising concerns that the market remains in a downtrend. The large-cap index was on pace for its second straight loss of 1 percent or more, the longest such streak in the four trading days that ended June 13, according to Dow Jones market data.

“We’re seeing fears that the Federal Reserve is acting aggressively or continuing to act aggressively in raising interest rates, which is pushing stocks lower,” said Fiona Cincotta, senior financial markets analyst at City Index in London. “The market realizes that the Fed is unlikely to pivot low anytime soon, even though there was softer inflation a few weeks ago.”

“Powell’s speech will be the key event this week, but the market doesn’t really expect a strong turnaround from the Fed anymore, which is why we see stocks under pressure and the dollar rising,” she said by phone. Now that the S&P 500 has fallen below 4,180, that opens the door for the index to continue falling to 4,100 or 3,970, according to Cincotta.

Look: Once offering the worst returns on Wall Street, cash now looks like the best asset to own, says Morgan Stanley and ‘Uncomfortable’ with S&P 500 Valuations? Investors can still find “bargains” in small-cap stocks, RBC says

The dollar index
dxy,
+0.80%

returns near 20-year highs as worries about European economy amid rising energy prices drag euro
EURUSD,
-1.05%

to below parity with the dollar. A strong dollar is associated with weaker stocks because it erodes the foreign earnings of US multinationals, making them worth less in US dollars.

Which companies were in focus?

• Shares of AMC Entertainment Holdings
  AMC,
  -0.59%

  were down 1.4% like those of the company a new class of preferred stock began trading under the ticker “APE”.

• It means health
  SGFY,
  +32.08%

  shares jumped 32% after a Wall Street Journal report saying that Amazon.com Inc. is among several companies bidding for the home health care provider. The health care company is said to be sold in an auction that could value it at more than $8 billion, according to The Wall Street Journal, citing people familiar with the matter.

• Travel stocks fell with shares of cruise lines such as Carnival Corporation
  CCl,
  -4.71%,
  Royal Caribbean Group
  RCL,
  -4.44%

  and Norwegian Cruise Line Holdings
  NCLH,
  -4.48%

  decrease by more than 4% each.

How are other assets doing?

• The yield on 10-year government bonds
  TMUBMUSD10Y,
  3.033%

  rose 4 basis points to 3.02%.

• The general risk aversion tone of the market is affecting most asset classes. Oil futures
  CL.1,
  -0.62%

  were lower, with U.S. crude oil down 1.4% to $89.49 a barrel.

• Gold futures recorded their lowest settlement in nearly four weeks, a sixth straight session for their longest losing streak since early July. Gold futures
  GCZ22,
  -0.73%

  U.S. crude for December delivery fell $14.50, or 0.8%, to $1,748.40 an ounce, the contract’s lowest active settlement since July 27, FactSet data showed.

• The US Dollar Index ICE
  dxy,
  +0.80%,
  a gauge of the dollar’s strength against a basket of peers, rose 0.8 percent to 109.01, surpassing a multi-decade peak hit last month.

• Bitcoin
  BTC USD,
  -1.74%

  fell 1.4% to $21,229.

• In Europe Stoxx 600 capital index
  SXX,
  -0.96%

  ended down 1%, while Britain’s stock market benchmark FTSE 100
  Z00,
  -0.13%

  closed 0.2% lower. In Asia, most stocks were also lower, despite China’s Shanghai Composite
  SHCOMP,
  +0.61%

  bucked the trend to finish up 0.6% after the country’s central bank cut mortgage rates in support of the struggling property sector.

— Jamie Chisholm contributed to this article.