“I don’t think they’re necessarily trying to reduce inflation by destroying stock or bond prices, but it does have that effect.” Tim Courtney, chief investment officer at Exencial Wealth Advisors, said in an interview. US stocks fell sharply last week after hopes of a sharp drop in inflation were dashed by a warmer-than-expected inflation reading in August. The data boosted expectations among Fed-funds futures traders for a rate hike of at least 75 basis points when the Fed concludes its policy meeting on September 21, with some investors and analysts looking for a hike of 100 basis points or a full percentage point . Preview: The Fed is ready to tell us how much ‘pain’ the economy will suffer. However, it will not indicate a recession. The Dow Jones Industrial Average DJIA, -0.45% was down 4.1% for the week, while the S&P 500 SPX, -0.72% was down 4.8% and the Nasdaq Composite COMP, -0.90% was down 5.5%. The S&P 500 closed Friday below the 3,900 level seen as a major technical support area, with some chart watchers considering a test of the 2022 large-cap benchmark low of 3,666.77 set on June 16. Watch: Stock bears hold upper hand as S&P 500 slips below 3,900 A profit warning from global shipping giant FedEx Corp. and its financial campaign. FDX, -21.40% further stoked recession fears, contributing to losses in the stock market on Friday. Read: Why FedEx’s stock drop is so bad for the entire stock market Bonds also fell, with the yield on the 2-year note TMUBMUSD02Y 3.867% jumping to a near 15-year high above 3.85% on expectations that the Fed will continue to push interest rates higher in the coming months. Yields rise as prices fall. Investors are operating in an environment where the central bank’s need to rein in stubborn inflation is widely seen as having eliminated the notion of a figurative “Fed sell” in the stock market. The idea of selling the Fed has been around since at least the stock market crash of October 1987 prompted the Alan Greenspan-led central bank to cut interest rates. A put option is a financial derivative that gives the holder the right but not the obligation to sell the underlying asset at a specified level, known as the strike price, that serves as an insurance policy against a market downturn. Some economists and analysts have even suggested that the Fed should welcome or even target losses in the market, which could serve to tighten financial conditions as investors curb spending. William Dudley, the former New York Fed president, argued earlier this year that the central bank would not handle inflation approaching a 40-year high unless it made investors suffer. “It’s hard to know how much the Federal Reserve will need to do to get inflation under control,” Dudley wrote in a Bloomberg column in April. “But one thing is certain: to be effective, it will have to cause more losses to stock and bond investors than they have so far.” Some market participants are not convinced. Aoifinn Devitt, chief investment officer at Moneta, said the Fed likely sees stock market volatility as a byproduct of its efforts to tighten monetary policy rather than a goal. “They recognize that stocks can be collateral damage in a tightening cycle,” but that doesn’t mean stocks “need to crash,” DeWitt said. The Fed, however, is prepared to tolerate seeing markets retreat and the economy slow, even into recession, as it focuses on reducing inflation, he said. Latest: Fed’s Powell says easing inflation will hurt households and businesses in Jackson Hole speech The Federal Reserve kept the target Fed Funds rate in a range of 0% to 0.25% between 2008 and 2015 as it dealt with the financial crisis and its aftermath. The Fed also cut interest rates near zero again in March 2020 in response to the COVID-19 pandemic. With interest rates low, the Dow DJIA, -0.45% soared more than 40%, while the large-cap S&P 500 SPX, -0.72% jumped more than 60% between March 2020 and December 2021, according to Dow Jones market data. Investors have gotten used to “the tailwind of more than a decade of falling interest rates” while looking for the Fed to step in if the going gets tough, said Courtney at Exencial Wealth Advisors. “I think (now) the Fed’s message is ‘you’re not going to get that tailwind anymore,’” Courtney told MarketWatch on Thursday. “I think markets can grow, but they should grow on their own because markets are like a greenhouse where the temperatures have to be kept at a certain level all day and all night, and I think that’s the message that market can and should grow on their own without the greenhouse effect”. See: Opinion: The stock market trend is relentlessly down, especially after this week’s big daily drops Meanwhile, the Fed’s hawkish stance means investors should be prepared for what could be “a few more stabs to the bottom” that could ultimately turn out to be “the ultimate big washout,” said Liz Young, chief investment strategy at SoFi on Thursday. Note. “This may sound strange, but if this happens quickly, within the next couple of months, that will actually become the case for the bulls in my view,” he said. “It could be a quick and painful drop, resulting in a new move higher later in the year that will be more durable as inflation eases more noticeably.”
