The Fed may no longer be a friend of investors, pros say, and that could be a major headwind to stocks in the near-term.
“What’s dangerous about yesterday’s huge market slump is that there must be an element of doubting the ability of there to be an effective ‘Fed Put’ in this cycle following a 30-40 year period where the central bank has almost always been able to come to the market’s rescue,” Deutsche Bank strategist Jim Reid said.
The Dow Jones Industrial Average plunged 1,120 points on Thursday, or 3.3%. The S&P 500 tanked 3.7%. As for the Nasdaq Composite, it tanked 5.2% for its worst day since 2020. Amazon shares hit a fresh 52-week low.
“As bad as today was, the VIX Index is not showing sufficient ‘fear’ to indicate a near term bottom,” said the team at DataTrek. The VIX settled at 32.85 on Thursday.
Thursday’s brutal session represented a swift sentiment reversal from Wednesday, when traders breathed a sigh of relief after Federal Reserve Chairman Jerome Powell said that the central bank was not considering a 75 basis-point increase in interest rates.
The Dow Jones Industrial Average soared 932.27 points and the S&P 500 gained 2.99% on Wednesday, the largest gains for the two indices since 2000. Even the beaten-up Nasdaq Composite popped 3.19%.
As Reid suggested, it now appears that traders have formed a more lasting near-term view that the Fed is far from dovish, has let inflation get out of control, and is still poised to dramatically slow down the economy through a series of 50 basis point rate increases.
“I can’t help but think that a great deal of the reaction yesterday was the appreciation that whilst the Fed can make soothing pronouncements, they are starting from an extraordinary difficult starting point and with limited flexibility to respond to market or economy concerns whilst they fight inflation,” Reid added. “The only conclusion you can draw is that the market quickly realized that the Fed really aren’t going to be able to control this cycle very easily.”