Following a brisk start to the new year for the equities sector, the market weakened recently, posing the question, why are stocks down today? Primarily, Federal Reserve Chair Jerome Powell opened the door to perhaps an incredibly telegraphed move: higher and quicker benchmark interest rate hikes.
Earlier today (and still ongoing as of this writing), the policy leader disclosed prepared remarks to the Senate Banking Committee. According to the Wall Street Journal, better-than-expected economic data partly reversed softening inflation trends. Due to this adjusted framework, the Fed may consider additional rate hikes at its next meeting this month.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Even before Powell’s remarks, the queries about “why are stocks down today?” have been lighting up internet search engines. For instance, late last month, InvestorPlace contributor Dana Blankenhorn noted that the Personal Consumption Expenditures (PCE) index came in higher than expected.
Given the Fed’s commitment to control inflation, the PCE data and robust employment figures will likely force the central bank’s hand.
Why Are Stocks Down Today Despite Strong Jobs Data?
On paper, and in perhaps most other contexts, governments strive for robust employment figures. However, it’s possible to have too much of a good thing. And that ties into a key talking point undergirding the question, why are stocks down today?
At the basic level, strong employment implies more dollars (from gainfully employed workers) chasing after fewer goods (due to increased competition for resources). Prices must move higher to feed demand efficiently and to avoid supply chain chokeholds. In other words, the higher-price environment enables an opportunity for people who want the goods the most to get them.
Unfortunately, this dynamic creates gross social inequities as households with the most dollars always win. Therefore, the Fed must cool inflation, often by raising the benchmark interest rate. However, the rising borrowing costs dampen expansionary activities (because entities don’t want to borrow against high rates).
Therefore, the Fed wants to engineer a soft landing when inflation recedes without a recession, per the WSJ. Unfortunately, the aggressiveness of previous rate hikes — combined with the stubbornness of inflation — makes this an improbable task.
Hence, many investors rushed to a flight to quality or even to cash. Because the market senses more significant challenges ahead, this dynamic answers the question, why are stocks down today?
Why It Matters
With Powell opening the door to higher and possibly faster interest rate hikes, investors should pay close attention to consumer sentiment, particularly for big-ticket items like real estate. Some market observers have grown increasingly worried about a possible housing market crash. Indeed, rising rates won’t help assuage those concerns.
On the date of publication, Josh Enomoto did not have (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.