Fed Talks Cause “Collateral Damage”

Equity markets slumped late last week, and the story remains the same. Hawkish policymakers cranked up their rhetoric into their own quite period which begins this week and lasts through May 4th.  On the week, the S&P 500 fell -2.8%, with only consumer staples and banks positive.

On Thursday last week, with the Fed heading into its comment “blackout window” period, in a morning interview, Fed Chairman Jerome Powell lauded the actions of previous Fed Chairman Paul Volker.  In that interview, Powell praised Volker’s actions of cutting off America’s inflation threat in the 1970’s.  With those words, the market peaked, volatility in all asset classes started spiking, and a 2.5-day, -6% decline in the S&P500 has ensued.

The last 3 days have been a hard lesson in “collateral damage”, forced delevering (selling stocks that investors had borrowed money to buy), and margin calls.

Financial markets have now basically priced in two 50 basis point interest rate hikes at the Federal Reserves next two meetings. This is while the economic data has been peaking and growth moderating.  There are currently more downside risks to growth than upside throughout summer.  Current economic slowdown causes include, China Covid shutdowns hurting manufacturing; Russian invasion in Ukraine causing European growth to slow and consumer sentiment to tank overseas; and higher commodity prices squeezing consumer demand and corporate profits domestically.

Fear about a global economic slowdown heighten over the weekend. Asian stock markets cratered Monday led by a 5% sell-off in China’s following news that virus lockdowns now include Beijing.  These lockdowns are hitting the recent momentum trades favorite group in 2022, commodity stocks particularly hard.  Iron ore dropped between -8-12% in Asia.  Oil is down -6% this morning.

The focus this week is on earnings. Heading into the reporting period, bottom-up expectations were for positive 6.3% year to year growth in S&P 500 earnings. This is positive, but a slowing from recent quarters. Earnings are doing ok, and so far, the “forward guidance” is not as bad as some predicted. It’s very early in reports, but 79%% of the S&P 500 have beat expectations.

165 companies in the S&P 500 report earnings this week. This includes the five Mega Cap Tech stocks (FB, AMZN, AAPL, MSFT, GOOGL). Beyond Technology, many Industrials (BA, GM, F, GD, CAT, MMM, RTX), Consumer (PEP, CMG, MCD), Healthcare (MRI, BMY, LLY, IQV, GILD, SYK, ABV), Energy (PSX, CVX), and Financials (V) also report.

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Fed Talks Cause “Collateral Damage”
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Fed Talks Cause “Collateral Damage”
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Equity markets slumped late last week, and the story remains the same. Hawkish policymakers cranked up their rhetoric into their own quite period which begins this week and lasts through May 4th. On the week, the S&P 500 fell -2.8%, with only consumer staples and banks positive.
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