The Dow Jones index stopped a step away from the abyss (September 23, 2022)

The sell-off of technology stocks amid another wave of fears associated with a rate hike and recession expectations has become a tradition this year. It is these papers that suffer from such fears in the first place. But technology stocks that have no profits are especially sensitive to such sentiments.

The latter need constant funding and during the “bubble”, when the market was bathed in cheap money, they had no problems with this. However, tightening monetary policy threatens not only their stock prices, but the very existence of such companies.

That’s why Goldman Sachs’ basket of unprofitable technology stocks has fallen 12% since early September. If the quotes had not changed before the beginning of October, then this would have been its worst result in a month since May.

Dow, S&P and Nasdaq, of course, also suffered losses in September, but not so big – 4.6%, 5% and 6.3% respectively. And the fact that the scale of the decline in these indices can be easily explained by the different share of technological stocks in them is also a tradition of this year.

Yesterday, the ratio of losses to technology was very noticeable, with the Dow Jones Industrial Average down 0.35%, the S&P 500 down 0.84% ​​and the Nasdaq Composite down 1.37%. They are separated by a few percent from the lows of the year. The Dow is the closest with 1.4% left.

Thursday was the second day of decline after the Fed rate hike and the chairman’s hawkish speech. Now the market is waiting for a 75 bp rise in November and another 50 bp in December. And it is widely believed that the level reached by that time (4.25-4.5%) will be incompatible with economic growth in the United States.

But many believe that the rate will go even higher. Fed Chairman Jerome Powell is making a remarkable effort to appear as the reincarnation of Paul Volcker, who twice drove the economy into recession. And financial conditions in the US are tightening because of this, which is exactly what the Fed needs to fight inflation.

Yields on the Treasury bond market are rising. Yesterday, for 10-year-old US Treasury, it reached its maximum since February 2011 (3.716%), and for two-year-olds – since October 2007 (4.1565%). And it doesn’t just affect other bonds or stocks.

On Thursday, Freddie Mac announced that average 30-year mortgage rates reached 6.29%, the highest since October 2008. This, of course, puts pressure on the housing market. Existing home sales have been declining for seven consecutive months.

The FRS would also not refuse a consistent cooling of the stock market: its growth in the United States, where the population owns shares worth tens of trillions of dollars, greatly softens financial conditions. But for now, she can’t wait to see the sell-offs interrupted by bear rallies. Price rises not only happen, but are sometimes so powerful that the public begins to believe in the return of the bull market.
The summer growth was especially bright – July and the first half of August turned out to be the best start of the III quarter since 1932 for American stocks. Weaker similarity was last week and the week before last, when the indices posted a rare streak of four straight days of gains, all the while ignoring the Fed’s daily hawkish statements.

So tougher rhetoric and policy than would be possible in a less developed stock market is a necessary measure for the Fed to cool the ardor of the bulls. And this increases the chances of a mistake: raising the rate is still a rather rough tool and affects the economy with a time lag. This means that the chances of both a recession and a deep drop in the indices are growing.
Meanwhile, many central banks are guided by the Fed. “The Fed has paved the way for much of the world to continue aggressively raising rates – and that will lead to a global recession,” Ed Moya, senior market analyst at Oanda, told CNBC yesterday. “And how serious it will be depends on how long it takes for inflation to come down.”

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