October Bonanza and the Fed’s stance give room for more falls on Wall Street

In October, before knowing the position that the Federal Reserve (Fed) for the last two interest rate movements at the end of the year, the index Dow Jones accumulated an amazing advance of 13.94 percent.

The leading index of Wall Street posted his best month in 46 years and both his extended benchmark, the S&P 500As the Nasdaq Tech stocks advanced after two months of sharp declines. But the smiles lasted two days.

The US central bank increased its interest rate by 75 basis points on Wednesday, to a range between 3.75% and 4 percent. The move was widely expected by the market, but there was a surprise.

In his conference, the president of the monetary authority, Jerome Powellsaid that, although the next rate movements could be more moderate (a positive news), two other issues should not be forgotten:

The first one is that the persistence of inflation could force rates to be raised more than expected (a negative impulse). The second is that rates could remain high for a long time (a very negative thing).

“Investors have been left baffled, as on the one hand they think we could see an end to rate hikes soon, but on the other hand Powell sent us an aggressive message,” said Javier Molina, an analyst at eToro.

The market response was immediate. All three indices fell sharply. The Nasdaq was the most affected, with 3.36%; followed by the S&P 500, with 2.50%, and the Dow Jones, with 1.54%, all in their third consecutive fall.

Among the main stocks, falls offered us a strong opinion. Apple shares lost 3.73%, while Coca-Cola shares fell 1.65% and showed that no sector is exempt from pressure.

How much further can the market fall?

From the last day of 2021 to the last day of September (period before the happy October), the Dow Jones accumulated a drop of almost 21%, the Nasdaq fell 32.40% and the S&P 500, 24.70%, all of them within the bear market.

By October, investors were reveling in the idea of ​​a change in reality. Big gains came amid speculation about what Jerome Powell’s message to Americans would be.

That same month the three indices had marked their lows for the year and their large recoveries were the product of positive economic figures and bets on an improvement in the outlook for monetary policy.

Another factor that gave rise to the advance was the quarterly reports: more than 70% of the companies reported profits higher than expected and in October 50% of the shares of the S&P 500 had rises in double digits.

Bets on a recession to calm inflation, induced by a restrictive monetary policy, were reactivated. The estimated limit scenario for rates is also less certain than it seemed before.

“Investors are not now in a position to take the risk that interest rates continue to rise. What we know for now is that inflation remains stagnant, maintaining the restrictive moment,” said Molina.

“If we have to do a valuation, discounting at higher interest rates, the picture is less attractive and probably corporate results can become less attractive as well,” he added.

The possibility that profits could fall at the same time that rates remain high and the economy contracts to face inflation is now at the forefront of investors’ bets.

“We return to the time of value, to reviewing company by company, it will not be a matter of sectors and it is not the time to stop at the indices. We will have to decide again with caution,” Molina said.

A day after the announcement, US stocks deepen their losses led by technology stocks, more sensitive to high rates and which mostly disappointed with their numbers for the quarter.

jose.rivera@eleconomista.mx