It has been a rather interesting few days in the stock market. Yesterday, investors couldn’t make up their mind as to which direction the stock market would be headed. But with stocks down today, it’s becoming more clear that the market is digesting recent Fed speak in a more bearish light.
Specifically, the market took comments from Federal Reserve Chair Jerome Powell yesterday as hints that we could be nearing the end of rate hikes. Multiple references to disinflation during a speech in Washington is what caused such optimism.
However, subsequent comments about the need for further rate hikes despite these encouraging data has soured investors’ near-term view of the markets. Currently, the S&P 500, Nasdaq and Russell 2000 are all down around 1% as investors continue to digest these comments.
Let’s dive into what investors should make of this bumpy price action in the market.
Why Are Stocks Down Today?
It’s becoming increasingly clear that Federal Reserve rhetoric drives price action in the markets right now. Yes, there are geopolitical concerns. Fiscal policy actions also impact stocks. But for all intents and purposes, the stock market appears to be a voting machine for how aggressive or loose Fed policy will be moving forward.
Undoubtedly, low interest rates have boosted the economy coming out of the pandemic. No one is going to debate that. But with the American consumer still showing strength despite higher interest rates, it appears clear that inflation could be longer-lasting this time around.
Thus, the view that the Fed will cut rates in short order may be misguided. Today’s selloff suggests as much.
Of course, the extent to which equities are mispriced is difficult to gauge. While Powell’s comments yesterday may not be the dovish pivot everyone hoped for, the comments are still a step in the right direction. However, right now, Powell is maintaining a rather hawkish stance. That’s not good for the near-term view of the markets for traders.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
