Stock Market News

The stock market dipped slightly Thursday amid concerns that the Federal Reserve will continue its aggressive rate hikes in the months ahead.

Words from St. Louis Fed President James Bullard – and other Fed members – certainly didn’t help.

The Dow Jones Industrial Average dropped 8 points, or 0.02%. The S&P 500 slipped 0.3% and the Nasdaq Composite fell 0.4%. The Nasdaq is on pace to have its first calendar year without a new record high since 2014, according to Dow Jones market data, though all three indexes ended well above their lowest levels of the day.

Overall, "Bullard shook the market by the shoulders today,” wrote Daniel Berkowitz, senior investment officer for Prudent Management Associates.

St. Louis Fed President James Bullard said that the Fed has more work to do in lowering the rate of inflation. He said that the federal funds rate could reach 7%, which is above current market expectations. He also added that rate hikes have only had a limited impact on inflation so far. Higher rates are designed to lower inflation by reducing economic demand.

Bullard was just one of several Fed speakers Thursday. Atlanta Fed President Raphael Bostic, Fed Governor Michelle Bowman, Fed Governor Phillip Jefferson, and Minneapolis Fed President Neel Kashkari spoke. Kashkari said the Fed should be sure that inflation has peaked before halting rate hikes.

Thursday’s stock market trading was a continuation from Wednesday, when the Nasdaq dropped more than 1% after two Fed members reminded markets that the Fed has no plans to pause its rate hikes yet.

"The Fed came out yesterday with ‘Aggressive Fed Speak’ trying to claw back the loosening of Financial conditions,” wrote NatAlliance Securities’ Andrew Brenner.

The Fed must speak hawkishly, especially because bond yields have dropped this month as the rate of inflation has started to decline. The two-year Treasury yield, a barometer for expectations about the federal funds rate, gained Thursday to 4.452% from a low in the morning of 4.348%.

That is denting the stock market, though the losses are also a response to a recent stock market rally. The S&P 500 entered Wednesday up about 12% from its lowest close of the year in early October, which came on hopes of a slower pace of rate hikes. The rate of inflation has been declining, and markets now expect the Fed to raise the federal funds rate by a half of a percent in December, rather than the three quarters seen in the past meeting.

The rally, combined with Fed hawkishness, was certainly a recipe for two days of declines.

“In the very short term, this bear market rally probably doesn’t have much left in it,” wrote Peter Boockvar, chief investment officer of Bleakley Advisory Group.

One factor the stock market is aware of: “rates will be volatile as long as uncertainty remains regarding the likelihood of recession versus a soft landing next year,” said David Petrosinelli, managing director and senior trader with InspereX.

Indeed, markets must reflect some possibility that the Fed must remain aggressive. There is still a roughly 15% chance of a three-quarter point raise in December. Indeed, while inflation is declining, it remains well above the Fed’s 2% target. So if it doesn’t continue falling, the Fed could remain aggressive. That is reflected in the “yield curve.” The two-year Treasury yield remains at a higher level than the 10-year Treasury yield, often a sign that indicates a recession is coming.

"For all the discussion about falling inflation and Fed pivots, 10s-2s has been remarkably consistent: Fed rate hikes will be too much for the economy,” writes Sevens Report’s Tom Essaye.