Key US stock indexes closed with a significant decline on Tuesday, with the largest loss of -2.26% in the Nasdaq Composite. Investors are reacting to the more aggressive stance of Fed officials, the ongoing war in Ukraine, and its impact on the energy market.
The stock market is showing highly volatile trading this week, with some analysts pointing to warning signs that investors are confused.
A strong recovery last month was followed by sharp falls in the indices this week.
On Tuesday, the Nasdaq Composite fell 2.26%, the Dow Jones Industrial Average fell 0.8%, and the S&P 500 slipped 1.26%.
Technology stocks have suffered the most. On Tuesday, shares of Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) fell 1.89%, 1.3% and 2.55%, respectively.
Shares of Google Alphabet (GOOGL, GOOG), AMD (AMD), and Nvidia (NVDA) were down 1.67%, 3.36% and 5.22%, respectively.
Tesla (TSLA) shares fell 4.73%.
Meanwhile, stocks in some industrial and healthcare sectors rose on Tuesday. Shares of Johnson & Johnson (JNJ) and Pfizer (PFE) added 0.65% and 0.59%, respectively.
Procter & Gamble closed up 0.35% on Tuesday and Walmart (WMT) was up 0.25%, but traded significantly higher throughout the day.
The market reaction was largely based on what they heard from Fed Governor Lael Brainard and San Francisco Fed President Mary Daly. Officials have spoken out in favor of higher rates to control inflation and a more aggressive cut in the assets the central bank holds on its balance sheet.
While plans were previously announced to cut the Fed's assets by $50 billion a month, new comments from the central bank hint at the potential for a monthly reduction of $80 to $100 billion. Balance sheet reduction could begin in May.
Brainard said she expects the Fed's balance sheet to be $9 trillion. “will shrink significantly faster” than it did during the last cut in 2017-2019.
“Currently, inflation is too high and is at risk of rising. The committee stands ready to take stronger action if inflation and inflation expectations indicate that such action is warranted,” Bernard said. In her opinion, these measures will not cause a recession.
Amid these comments, 10-year Treasury yields hit a new 2022 high.
The Fed has already passed its first rate hike this year, by 0.25% in March. Markets are looking for an increase in each of the six remaining meetings this year, possibly as much as 2.5% in total.
Recession fears continued to scare investors on Tuesday, with Deutsche Bank becoming the first major Wall Street bank to predict a coming US recession, citing the Fed getting more aggressive in its fight against inflation.
“The US economy is expected to be hit hard by additional Fed tightening by the end of next year and early 2024,” bank economists said in a note to clients on Tuesday. “We are seeing two negative quarters of growth and more than 1.5% rise in the US unemployment rate, events that clearly qualify as a recession, albeit a moderate one.”
"When the Fed's biggest pigeon turns into a bird of prey, you'd better pay attention," CNBC's Jim Cramer said Tuesday.
“Ultimately, the way this works, the economy will slow down and the stock market should reflect that,” Mark Zandi, chief economist at Moody's Analytics, told CNBC's Power Lunch on Tuesday. “So I expect the stock market to have some difficult months ahead as it eventually adjusts to what the Fed is doing and will do in the future.”
“The way the market is acting today is that the scenario is protection, with commodities-related sectors performing better while tech lagging behind due to high interest rate issues,” Keith said. Lerner, co-CEO and chief market strategist at Truist. "There are concerns about the economy and the Fed's ability to make a soft landing."
The situation in the global energy sector continues to be uncertain due to new sanctions against Russia and the potential refusal of Europe to supply energy resources from Russia. Oil futures traded mixed on Wednesday.
“Worries about a supply shortage have risen again as the US and Europe tighten sanctions on Russia,” said Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd.
The threat of new sanctions on Russia raised concerns over the proposal, countering fears of declining demand following a rise in U.S. crude oil inventories and an extension of the Shanghai lockdown.
The United States and its allies on Wednesday drafted new sanctions on Moscow over the killings of civilians in northern Ukraine, which President Volodymyr Zelensky called "war crimes" requiring proportionate punishment. Russia denied targeting civilians.
The proposed EU sanctions, which must be approved by the bloc's 27 member states, would ban the purchase of Russian coal and prevent Russian ships from entering EU ports. The UK also called on the G7 countries and NATO to agree on a schedule for phasing out oil and gas imports from Russia.
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