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U.S. Stocks Experience Challenging Week After Rate Hike Speculation 

U.S. stocks closed lower on Friday, June 23rd,2023, marking their worst week since March. 

The market downturn was influenced by Jerome Powell’s comments, suggesting the possibility of one or two more interest rate hikes by the Fed. Additional rate hikes by central banks in Switzerland, Norway, and Turkey added to the negative sentiment. The Bank of England surprised investors by raising rates by 50 basis points, surpassing expectations. Recent rate increases in Europe led to a sharp slowdown in business activity, both in Europe and the United States, although the impact was milder in the U.S. 

These slowdowns were primarily attributed to the rise in bond prices, which are often seen as a safe haven during economic downturns.  

Atlanta Fed president Bostic provided some relief by stating his comfort with leaving rates unchanged for the remainder of the year.  

Meanwhile, the U.S. manufacturing purchasing managers index fell to 46.3 in June, the lowest reading since December, compared to 48.4 in the previous period. 

For the week, the S&P fell by 1.4%, the Nasdaq was down 1.3% and the Dow dipped 1.7%. 

Here are the closing levels on Friday, June 23rd,2023: 

 Last Change %Change 
Dow Jones 33,727.43 -219.28. -0.65% 
S&P 500 4,348.33 -33.56. -0.77% 
Nasdaq Comp13,492.52 -138.09. -1.01% 
U.S. 10Y 3.73%   
VIX 13.44 +0.53 +4.11% 

While it was a difficult week for investors, it is worth noting that the decline in stock prices was relatively small compared to the significant gains earlier this year. Some pullback was expected after the previous rallies, so it should not have come as a complete surprise. 

Perhaps the surprising aspect is that the pullback was not more significant given the hawkish statements from Powell and the other central banks. 

Despite a slight fade in the AI excitement, the market has demonstrated resilience in the face of negative news. 

Swap traders are now pricing in higher odds that the Fed will raise rates by 25 basis points in July, with expectations of rates remaining unchanged for the rest of the year, reducing the likelihood of a rate cut.

Nevertheless, many still believe that rate cuts may occur later this year, which could explain why the market has not experienced a more substantial sell-off. 

Investors continue to believe in the potential of AI, and history has shown that buyers tend to swoop in during market dips. 

While we have been emphasizing the potential negative effects of “higher for longer” interest rates on stock prices, the market has largely disregarded these warnings and acted contrarily. 

Conventional wisdom suggests that the economy will eventually face negative consequences from higher rates, particularly if they persist over prolonged periods. 

The VIX, also known as the fear gauge, currently does not reflect any significant fear in investors. 

Therefore, the warning may be that while stock prices may appear weak, there could be a looming sense of fear of missing out (FOMO) among buyers waiting to seize opportunities during market dips.  

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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