Jackson Hole has come and gone, and the only surprise may be that the stock market was perplexed.
But there was a surprise. The stock market started off on its back foot last week, a fitting response as investors felt they may have underestimated the prospects of a dovish Federal Reserve. Yet the market gained in Friday’s meeting, as investors took a dip. Then, Speaker Jerome Powell began talking. He told seminar attendees that the Fed needs to bring inflation back to its 2% target, that it will take time to do so, and that another big interest rate hike is likely in September. The speech, which could have lasted 30 minutes, took only 10.
“Fed Chair Jerome Powell’s speech at the Fed’s Jackson Hole conference today was short and flamboyant,” writes Ed Yardney, chief investment strategist at Yardeney Research. “He rejected any expectation that the Fed will halt its tightening and may lower interest rates next year.”
Did he ever, and the markets didn’t miss the message. The Dow Jones Industrial Average fell 3% on Friday and ended the week down 4.3%, while
The index fell 3.4%, down 4% at the end of the week. It was his worst week since June.
Not that investors are worried about what will happen in the next meeting. according to CME Fedwatch ToolAfter Powell spoke on Friday, the futures market had a 61 percent chance of a three-quarter point rate hike, up from 64% a day earlier. The real fear isn’t about the size of the next hike, but when the hike stops and how long rates stay high—even if it means a recession. ,[We] Do not think that the central bank is ready to ‘pivot’ just yet,” writes market economist Thomas Mathews at Capital Economics. “We suspect, this means the central bank will continue to be a headwind for the markets for some time.”
And especially for expensive growth stocks. It shouldn’t come as a surprise that the tech-heavy
Bearing the brunt of the loss, it ended the week down 4.4%, falling 3.9% on Friday. This makes sense, given that expensive growth stocks are most sensitive to rising interest rates, and stocks like
(Ticker: NVDA) and
(TTD), which trade at 42.7 and 57.9 times earnings respectively, still aren’t cheap.
However, investors are not ready to give up on them. According to data from Goldman Sachs, mutual funds traded at 20 times enterprise value/sales or more during the second quarter of the year. it means adding stock like
(SNOW), The Trade Desk, and Nvidia, among others. This worked well during the rotation from June lows, but could be especially painful if the Fed is going to raise rates more than investors expect. “This speech is likely to maintain downward pressure on equity markets with ‘growth’ trading. And the ‘long duration’ sub-sector and stocks taking the biggest hit,” writes strategist Chris Senyk at Wolfe Research.
It could be a rocky ride from now to the next Fed meeting on September 2.
write to Ben Levishon at ben.Levisohn@barrons.com