US stocks have suffered the worst streak of weekly losses in more than a decade after days of tumultuous trading surrounding the Federal Reserve’s decision to raise interest rates by half a percentage point.
The Nasdaq Composite, chock full of interest-rate sensitive tech stocks, slipped 1.4 per cent on Friday after another whipsaw trading session while the S&P 500 fell 0.6 per cent. Benchmark Treasury yields that underpin borrowing costs across the globe moved higher.
The stock market moves meant both indices lost ground over the full week, each notching their fifth straight week of declines. That represents the worst streak since June 2011 for the S&P 500 and November 2012 for the Nasdaq, when markets were being pummelled by the eurozone debt crisis and the aftermath of the global financial crash.
Trading this week was marked by strong rallies on some days but even sharper sell-offs on others as puzzled investors tried to position themselves for the end of the easy money policies embraced by central banks during the first two years of the pandemic.
“I think there is a lot more pain to come,” said James Masserio, co-head of equities for the Americas at Société Générale, who pointed to a “generational shift in inflation” and a “decade-long shift in monetary policy across the globe”.
Investors initially reacted with relief on Wednesday when the Fed raised its main interest rate 0.5 percentage points, the first rise of that magnitude in more than two decades. That was in part because chair Jay Powell appeared to rule out an even larger rise of 0.75 percentage points for now.
But the initial response was followed by two days of heavy selling.
Analysts and investors offered multiple theories for the sharp gyrations, yet the main mood was one of disorientation.
“There is an enormous amount of confusion in markets,” said Kristina Hooper, chief global market strategist at Invesco.
Stuart Kaiser, head of global equity derivatives research at UBS, noted the downturn was “puzzling”, adding that his team had “found little consistent feedback from investors”.
Some pointed to the Bank of England’s decision to raise interest rates on Thursday morning while also forecasting that a recession was in the offing — a bleak outlook that sent sovereign bond yields climbing.
With Treasury yields rising when stock markets opened in the US on Thursday morning, equities moved lower and companies deemed to be especially sensitive to higher rates were hit particularly hard.
As the 10-year yield crossed 3 per cent, bankers said some mortgage traders started to offload bonds, exacerbating the sell-off. Fears of more sustained inflation and higher rates also brought in more sellers, according to the markets head at one large US bank.
On Friday, the US bureau of labour statistics published another strong jobs report, which showed American employers added 428,000 jobs in April, topping forecasts for 391,000 new hires. It was the 12th jobs report in a row to show a monthly gain of more than 400,000.
Average earnings rose 5.5 per cent year-on-year in April, staying above 5 per cent for the fourth consecutive month.
The wage data compounded concerns over persistent inflation, helping to push Treasury yields up to 3.1 per cent while dragging stocks lower. The dollar index, which tracks the US currency against six others, hit a fresh 20-year high on Friday.
“Ongoing wage pressure will be considered by many people in the markets as an indicator inflation is becoming more embedded in the system and [will] heighten worries around where rates will go,” said Maria Municchi, a multi-asset portfolio manager at M&G.
Despite a lack of consensus over the reasons for the topsy-turvy week of trading, investors agreed the wild swings in prices were a product of heightened volatility that has been evident for most of the year. Some market participants warned there was no end in sight.
“The financial environment for everybody is getting considerably more difficult than it has been,” Masserio said. “Whatever way you slice it, that’s bad for risk assets like equities.”
Additional reporting by Harriet Clarfelt and Ian Johnston
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