Pivot Expectation & Potential Recession - Doo Prime News
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U.S. stocks fell into a hole on Friday, 26th August 2022— Jackson Hole to be precise. 

Last week, we heard from a few Fed officials calling for higher rates to fight inflation. 

While the market was expecting some kind of follow through on these comments, they were not prepared for the hawkish stance taken by Chairman Jerome Powell. Here is the link to his speech. 

In short, he said clearly that rates would likely stay high for some time, dismissing the expectation that the Fed will pivot, i.e. reduce rates soon after reaching its peak. 

This pivot expectation, along with some strong corporate earnings were the cause of the recent rally in stocks we saw a few weeks ago. 

Now, we have the Fed potentially doing more jumbo hikes to “do what it takes to bring inflation down”.  

Futures were pricing the odds, for a 50-basis point hike, equal to a 75-basis point hike.  

Also, the chances of them lowering rates next year are now looking unlikely, unless inflation comes down dramatically. 

What is most worrying is that the Fed is aware that in order to fight inflation, they might bring on a recession rather than a soft landing everyone was hoping for. 

All 3 major indices, the Dow, S&P, and Nasdaq fell over 3 % with the Nasdaq 100 falling more than 4%.  

Here are the closing levels on Friday, 26th August 2022:. 

 Last Change %Change 
Dow Jones 32,283.40. -1,008.38. -3.03% 
S&P 500 4,057.66. -141.46. -3.37% 
Nasdaq Comp 12,141.71. -497.56. -3.94% 
U.S. 10Y 3.04%   
VIX 25.56 +3.78 +17.36% 

The market is finally waking up to the reality that inflation is high and stubborn. It is unlikely to fall quick enough in the near term to make the Federal Reserve go dovish. 

Rates may have to stay high for a long time before the inflation target of 2% is achieved. 

This will potentially bring the economy into a recession and affect corporate earnings and their stock prices will have to reflect that. 

While corporate earnings were able to do well recently, it is hard to imagine it continuing to do well with higher for longer rates. 

The selloff opened some wounds in the technical picture with prices below the 100-day moving averages. Some support levels were taken out and the odds are, that more will be taken out in the next few days. 

I am sure there is still a lot of money out there looking for bargains and we might see the odd rally here and there. But, it’s hard to see any kind of sustained bull run in the near future. 

Like I said last week, caution is advised. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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