Stocks succumbed to a nasty bought of selling pressure on Tuesday after new Federal Reserve chairman Jerome Powell sounded a hawkish note in his first appearance to Congress. This eclipsed the recent dovish commentary from other Fed officials in recent days — most notably, St. Louis Fed President Bullard and his reassurance that more bond buy stimulus would be used in the next recession.
And it sent bond yields higher once more, the primary reason for the steep selloff seen earlier in the month.
In the end, the Dow Jones Industrial Average lost 1.2%, the S&P 500 lost 1.3%, the Nasdaq Composite lost 1.2% and the Russell 2000 lost 1.4%. The selling continued after the close, with the Dow dropping another 50 points to trade down 351 — well off of the intra-day gain of around 100 points.
Treasury bonds weakened, pushing the 10-year yield towards 3%. The dollar strengthened. And both crude oil and gold weakened. Breadth was terrible, with decliners outpacing advancers by a ratio of 3.3-to-1 on the NYSE.
Real estate and railroad stocks led the way with gains of 2.2% and 2.1%, respectively. Broadcast and media stocks were the laggards, down 2.9% and 2.7%, respectively.
Powell struck a hawkish note Wall Street hasn’t dealt with since 2007, laying down a marker that he isn’t interested in kowtowing to a market that has grown accustomed to pushover Fed officials that issue soothing words and more stimulus at the first hint of trouble.
With both the economy and the labor market over capacity at a time of aggressive fiscal stimulus and the detritus of years of aggressive monetary policy support, he simply has no choice. Inflation is coming. And if the Fed falls behind, it’ll be much worse.
So it’s time for the tough medicine as the “Goldilocks era” of low inflation, stable growth, persistent job gains and easy market gains ends.
The term structure of the CBOE Volatility Index (VIX) suggests more pain is coming, since higher near-term volatility expectations makes popular “Short VOL” strategies unprofitable.
Powell’s comments come in stark contrast to comments made by former Fed chairman Janet Yellen, who was interviewed by her predecessor Ben Bernanke for a Brookings interview. She highlighted the belief that there isn’t a tight connection between wage growth and inflation. Such a comment to Congress, if Yellen were still in the driver’s seat, would’ve no doubt powered a market rally to new highs.
But that didn’t happen as Powell noted an increased confidence that inflation is moving higher since the Fed’s December policy meeting. He also warned about Washington’s spending spree (says the fiscal situation is unsustainable) and said there is a high bar to slowing the Fed’s plans to accelerate its quantitative tightening balance sheet reduction plan.
Checking in with Jason Goepfert at SentimenTrader, by multiple measures, the rebound from the recent panic lows was too much too fast.
- The Nasdaq nearly recovered its losses in just 11 sessions, the third-fastest bounce back in history. Other quick recoveries led the losses.
- Stocks blew through their 50% and 62% Fibonacci retracements, something that only happened one other time and quickly led to fresh losses.
- The S&P 500 rose more than 1% on Friday and then again on Monday. There have been 24 other bookend gains like this. Further gains only happened 10 times with more risk than reward.
- And Monday’s gains marked the sixth rise of more than 1% in the 11 sessions since the low. There have been only 10 other times this happened since 1950 with stocks only showing gains in four cases. All eight instances since 1965 showed losses.
After tagging a 8% gain in the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ), I have recommended Edge subscribers prepare for further downside risk by establishing a position in the iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX).
Check out Serge Berger’s Trade of the Day for Feb. 28.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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