The S&P 500 extended its price drop for a third day, with SPY down 0.5% and trading at the ~$465 mark. NASDAQ 100 is being hit harder, currently down ~1%. Tech stocks within those indices are suffering so far this week – Amazon down over 3%, Google and Meta both down ~2.5%.
Powell back for more
Market participants are looking ahead at the US interest rate environment for 2022. Yesterday saw the Federal Reserve chairman, Jerome Powell, selected for a second term as head of the world’s most important central bank.
In his first term, Powell has been a proponent of “dovish” monetary policy, cutting interest rates to very low levels even before the COVID pandemic. Low interest rates help keep the economy churning, as the supply and cost of capital for both companies and individuals is made easier. His policies have been popular with Wall Street and the investing community, as markets have ripped higher. Since Powell’s appointment in Feb 2018, SPY is up over 70%.
Change of tune
The Fed have been focused on supporting the US economy in recent years but they have a new factor to tackle – inflation has hit 6.2% year-on-year. When the economy overheats, inflation starts ticking upwards and central banks turn to “hawkish” monetary policy and increase interest rates. This restricts the supply of money and increases the cost of capital. It is difficult to forecast when interest rates may normalise and by how much, but the change in narrative and inflation concerns is weighing on the equity markets.
The next few days may continue to be difficult unless we get further clarity on the Fed’s plan of action in balancing economic growth vs. inflation.