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Stocks sank after Jerome Powell gave a terse and clear message that interest rates will remain high for some time.
Michael Nagle/Bloomberg
Jackson Hole it has come and gone and the only surprise may be this the stock market was surprised.
But he was surprised. The stock market started last week on the back foot, an appropriate response, as investors seem to have realized they may have overestimated the chances of a dovish Federal Reserve. Yet the market regained its positions heading into Friday’s meeting as investors bought the dip. Then, Chairman Jerome Powell began to speak. He told those attending the symposium that the Federal Reserve needed to get inflation back to its 2% target, that it would take time and that another big rate hike in September was likely. A speech that could have lasted 30 minutes took only 10.
“Fed Chairman Jerome Powell’s speech today at the Fed’s Jackson Hole conference was short and vicious,” wrote Ed Yardeni, chief investment strategist at Yardeni Research. “He has overturned any remaining expectation that the Federal Reserve would do that.” pause his tightening and may cut rates next year.
Did the markets ever miss the message? The Dow Jones Industrial Average fell 3% on Friday and ended the week up 4.3%, while
the index fell 3.4% to close the week down 4.%. These were their worst weeks since June.
Not that investors are worried about what will happen at the next meeting. According to CME FedWatch tool, the futures market was pricing in a 61% chance of a three-quarter point rate hike after Powell spoke on Friday, down from 64% the previous day. The real fear doesn’t seem to be about the size of the next hike, but when the hikes stop and how long rates will stay high — even if that means causing a recession. “[We] I don’t think the central bank is ready to “pivot” just yet, wrote Thomas Matthews, market economist at Capital Economics. “This, we suspect, means the central bank will remain a headwind for markets for some time to come.”
And especially for expensive growth stocks. It should come as no surprise that heavy technology
bore the brunt of the damage, falling 3.9% on Friday to end the week down 4.4%. That makes sense, given that expensive growth stocks are most sensitive to rising interest rates and stocks like them
Nvidia
(ticker: NVDA) and
Trade office
( TTD ), which trade at 42.7 and 57.9 times earnings, respectively, still aren’t cheap.
However, investors can’t seem to leave them. Growth mutual funds loaded up on stocks trading at 20 times enterprise value/sales or more in the second quarter of the year, according to Goldman Sachs data. This meant adding stocks like
Snowflake
(SNOW), Trade Desk and Nvidia, among others. That worked well during the pivot from the bottom in June, but could be especially painful if the Fed intends to raise interest rates higher than investors expect. “This speech is likely to keep downward pressure on equity markets, with trading in ‘growth’ and ‘long-duration’ subsectors and stocks the hardest hit,” wrote Wolfe Research strategist Chris Seniek.
That could spell trouble between now and the Fed’s next meeting on September 2.
Write to Ben Levison c Ben.Levisohn@barrons.com