The Fed raised interest rates by 50 basis points as scheduled, but U.S. stocks fell more than expected.

The Dow had its best one-day performance and biggest one-day drop since 2020 last week, the Nasdaq had five consecutive weekly losses, the longest weekly losing streak since 2012, and the S&P 500 had the fourth-highest performance in history since the beginning of the year. worse, second only to the great market crashes of the 1830s and 1870s.

Worries about Fed policy, coupled with a rapid rise in U.S. Treasury yields, have hit tech and growth stocks particularly hard, as investors reassess sectors that had previously rallied.

As of last week, more than half of the Nasdaq’s constituent stocks have halved from their 20-year highs , or more than 50%. The Nasdaq is also the first of the three major U.S. stock indexes to enter a technical bear market.

The S&P 500 is down more than 12% year-to-date but has yet to officially enter a bear market. But some strategists and observers say the S&P 500 is pulling back like it did during a bear market. Wall Street banks such as Morgan Stanley have been saying that the U.S. stock market is approaching a bear market.

If the S&P 500 officially enters a bear market, Bank of America strategist Michael Hartnett has calculated how long the “pain” will last. They looked at the history of 19 bear markets over the past 140 years and found that the average price fell 37.3%, with an average duration of about 289 days.

Strong non-farm payroll

One reason for the volatile markets: Investors lack an obvious safe haven, as bonds and gold come under pressure from rising interest rates.

U.S. employment rose by 428,000 in April, beating expectations. Markets had expected nonfarm payrolls to rise by 400,000. The unemployment rate was 3.6%, slightly above expectations of 3.5%. Futures on the three major U.S. stock indexes rose after the data, indicating that market expectations for more aggressive tightening by the Federal Reserve have cooled.

A weak link in the employment report was the labor force participation rate, which was little changed month-on-month, still 1.2 percentage points below pre-pandemic levels. Economists believe a pickup in the participation rate could help curb wage increases and, in turn, inflation.

However, Amy Kong, chief investment officer at Barrett Asset Management, said the strong jobs report “could also mean that the Fed has a little more room to act aggressively.”

Stocks have seen wild swings in recent days as investors try to gauge how the Fed’s plans will affect the economy. Investors are torn between two different hopes: One is to raise interest rates big enough to curb rapidly rising inflation, and the other not big enough to undermine economic growth.

Altaf Kassam, head of EMEA investment strategy at State Street Global Advisors, said: “The market is trying to weigh whether central banks are more worried about inflation or more worried about economic growth. Restrained, the market has clearly assumed that the central bank is more worried about inflation.”

Barclays strategist Emmanuel Cau said in a note to clients that the widely expected rally in stocks and bonds was short-lived as the Federal Reserve was less hawkish than expected on Wednesday. “While there may not be a big 75bps rate hike ahead, the implied policy tightening cycle ahead is still very hawkish in our view. Unless soaring inflation reverses quickly, central banks may have no choice but to slow growth. , to slow inflation and maintain credibility.”

Investment banks take the pulse

After its worst April since 1970, Morgan Stanley’s bearish market chief U.S. equity strategist Mike Wilson also predicted Monday that the S&P 500 will face more selling, possibly to 3,400.

We see the S&P 500 down at least as low as 3,800 in the near term, and possibly as low as the 200-week moving average of 3,460 if EPS over the next 12 months start to decline due to margins and/or recession fears.

Ian Lyngen, head of U.S. rates strategy at Bank of Montreal (BMO) Capital Markets, also said the surge in U.S. Treasury yields as stocks fell, a sign that bond markets no longer believe the Fed will be able to keep the economy healthy while continuing to tighten policy to fight inflation. Soft landing.

Market players are giving up hope for a soft landing. In effect, it is saying that the policy will be overly tightened. The question now is when will we actually see a recession, followed by the Fed, after normalizing its policy rate to a certain extent, when will it be necessary to fine tune rate cuts.

Bank of America chief strategist Michael Hartnett predicts that the bear market in U.S. stocks will end at 3,000 in October this year. After reviewing the history of 19 bear markets in the past 140 years, the legendary Wall Street analyst and his team found that the average price of the U.S. stock bear market fell by 37.3%, and the average duration was about 289 days.

According to the Bank of America report, many stocks have reached a bear market. For example, 49% of Nasdaq stocks are more than 50% below their 52-week highs, and 58% of Nasdaq stocks are down more than 37.3%.

Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald, said: “There are many uncertainties in the current economic situation, including inflation, oil prices and global macroeconomic events. I think there may be some volatility going forward, possibly throughout the year.

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