Wall Street ends up in the red for another week, is the worst over?

The sell-off on Wall Street intensified last week, buoyed by sluggish inflation numbers and hawkish Fed talks that have put traders and investors off stocks.

All major stock indexes ended the week significantly lower, with the S&P 500 falling 1.9%, the Dow Jones Industrials 1.6% and the tech-heavy Nasdaq 2.4%.

Market participants were discouraged by sluggish inflation numbers both at home and abroad released during the week.

Domestically, the Fed’s favorite indicator of inflation, the Personal Consumption Expenditure Index (PCE), rose at an annual rate of 4.9% in August, above the 4.7% that markets were expecting and up from 4.7% in July.

The high inflation figures confirm that price increases are still ongoing. Additionally, these numbers came as the US job market remained hot. Jobless claims fell to 193,000 last week, well above the 215,000 expected by markets, hitting a five-month low.

Intractable price hikes and a hot labor market are putting pressure on the Fed to raise rates further, Fed officials reiterated throughout the week.

James Bullard, President of the St. Louis Fed, told a conference in London on Tuesday that more rate hikes are on the way. Loretta Mester, Chair of the Cleveland Fed, Charles Evans, Chair of the Chicago Fed, and Neel Kashkari, Chair of the Minneapolis Fed, made similar comments.

They reiterated Federal Reserve Chair Jerome Powell’s hawkish message after the last FOMC meeting that the Fed stands ready to hike rates until inflation returns to its official 2% target.

Overseas, euro-zone inflation was at an annual rate of 10% in September, down from 9.7% in August. It’s putting pressure on European Central Bank President Christine Lagarde to accelerate the pace of rate hikes in the eurozone, even as the 19-member bloc’s economy heads for recession.

Sticky inflation numbers and hawkish speeches from Fed officials dashed traders and investors’ hopes that interest rates would peak by the end of the year. As such, the sell-offs continued, particularly in areas of the market where stock valuations remain elevated, such as the Nasdaq.

But won’t the worst for US stocks be over when major indices drop somewhere between 20% and 30%?

According to one measure, the gap between the earnings yield of the S&P 500 and the 10-year bond yield, the answer is yes. Historically, this gap is around 200 basis points, which seems very close as of late. But that may change depending on new data that will provide more clues about inflation and the broader economy.

Bob Bilbruck, CEO of B2 Group and Captjur, a strategic consulting and business services firm, remains pessimistic.

“Inflation has just started to hit us and I think investors are a bit late to realize that we are in a recession with high inflation,” he told the International Business Times in an email. “The only thing missing to put us in true stagflation is high unemployment.”

Jeremy Bohne, founder of Paceline Wealth Management, is less pessimistic. He believes markets have already priced in rate hikes of 4.25% by the end of 2022.

“People are still trying to figure out if this will lead to a recession, most likely in 2023 when that happens,” he told IBT.

Bean reiterated the view circulating on Wall Street these days that a recession is the only way to bring inflation down since the old villain is already embedded in wages.

“So to fix this, the Fed needs to keep the unemployment rate rising to slow wage inflation,” he added.

https://www.ibtimes.com.au/wall-street-ends-another-week-red-worst-over-1839033?utm_source=Public&utm_medium=Feed&utm_campaign=Distribution Wall Street ends up in the red for another week, is the worst over?

Fry Electronics Team

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