So much for hope that the Federal Reserve will hit the brakes on its aggressive rate hikes. Shares fell on Monday as investors again began to worry that the central bank will raise interest rates by three quarters next month.
The Dow ended the day down more than 640 points, or 1.9%. The S&P 500 and Nasdaq fell 2.1% and 2.6% respectively.
All 30 Dow stocks were lower, and only 25 stocks in the blue chip S&P 500 traded higher on Monday.
Shares also fell on Friday as the market snapped a four-week winning streak. Markets have rebounded in July and August after a brutal first half of 2022. But the pendulum may swing back to pessimism.
The CNN Business Fear & Greed Index, which measures seven indicators of market sentiment, edged closer to the fear level on Monday morning. The index entered Greed territory just a week ago.
Concerns are growing that the Fed is not done with its super-sized interest rate hikes yet. The Fed raised interest rates by three-quarters of a percentage point, or 75 basis points, in both June and July.
But after the latest data on consumer and producer prices, which showed the pace of inflation cooling slightly last month, investors had begun to hope the Fed could raise interest rates by just half a point in September.
The idea was that inflation was slowing and the economy could slow down. However, the labor market is still strong and retail sales have held up reasonably well, despite inflation.
That has led several market watchers to predict that the Fed may remain aggressive with rate hikes for the foreseeable future. The odds of another 75 basis point rise versus half a point increase are now seen as around 50-50.
“The market’s expectations of what the Fed will do have a track record of reversing based on economic data,” Lindsey Bell, chief money and market strategist for Ally Invest, said in a report Monday. “As long as the Fed is in the driver’s seat, volatility is likely to remain high and the market will remain reactionary.”
Stocks could be volatile all week as investors await Fed Chair Jerome Powell’s much-anticipated speech at the Kansas City Fed’s annual Jackson Hole symposium on Friday. Also, the Fed’s next interest rate decision is not until September 21. So much economic data, including the jobs report and inflation numbers for August, is ahead of us.
“This has been more like a bull rally in a bear market,” Oktay Kavrak, director of product strategy at Leverage Shares, said of what has happened to stocks in recent weeks. “Recession is still a base case and inflation is still stubbornly high. This could be one of those years where the market remains choppy.”
Investors are clearly fleeing riskier assets as a result. Meme stocks, such as AMC ( AMC ) , Bed Bath & Beyond ( BBBY ) and GameStop ( GME ) were all back in the red on Monday after big drops late last week. Bitcoin and other cryptocurrencies also fell on Monday and have all plunged in the past week.