The US stock market is perhaps seeing the next leg down. Equities had rallied from the June lows but now it seems the markets will re-test those levels soon. The S&P is set to end its fifth decrease in the last six weeks, putting stocks on track for significant losses this week.
Monetary tightening is being followed around the world with other Central Banks hiking rates and catching up to the US Fed. Following the Fed’s decision to raise rates, the Bank of England, Indonesia, Norway, and the Swiss National Bank all increased interest rates in an effort to rein in excessive inflation. Global indices were thus forced to the brink, and the bond market saw significant losses. A 20-year high was reached for the dollar.
The US Federal Reserve had announced a 75 basis points (bps) rate hike in its FOMC meeting held on September 21. Since then, the market has been processing hawkish conclusions from Powell’s press conference, dot plot, and Fed rate hike. The dot plot showed Fed officials expected rates to rise to 4.4% in 2022 and 4.6% next year both exceeding market expectations. With officials predicting an additional 1.25 percentage points of tightening before year’s end, the Fed has sent the clearest message yet that it is willing to endure a recession as the necessary trade-off for regaining control of inflation.
Goldman Sachs Group has reduced its S&P 500 year-end forecast from 4,300 to 3,600, claiming that a sharp change in the outlook for interest rates moving higher will have a negative impact on valuations for US equities.
After a string of central banks joined the Federal Reserve in raising rates to combat soaring inflation at the price of economic development, Treasury yields soared to multiyear highs and stocks dropped. The world’s largest bond market saw a selloff, pushing the 10-year yield to 3.7%.