Stocks Fall Again as Investors Brace For the Fed to Take Away the Punch Bowl

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Stocks fell again last week as investors brace for the Federal Reserve to “take away the punch bowl,” by tightening monetary policy.

The S&P 500 slid 1.2 percent between Friday, November 26, and Friday, December 3. Following the earlier week, the index had its first back-to-back drops of at least 1 percent since early September 2020.

There’s a 53 percent chance of the central bank hiking rates at least three times next year, according to CME’s FedWatch tool. That’s up from just 29 percent a month ago. The change comes amid higher inflation readings and hawkish comments from policymakers like Jerome Powell and Raphael Bostic.

Biggest Gainers in the S&P 500 Last Week
Vertex Pharmaceuticals (VRTX)+11%
HP (HPQ)+8.6%
NXP Semiconductors (NXPI)+6.9%
Seagate Technology (STX)+6.9%
PTC (PTC)+6.6%
Source: TradeStation Data

Investors have responded by de-risking portfolios. Last week they dumped smaller and higher-multiple companies including Etsy (ETSY) and Twitter (TWTR). Small caps and recent initial public offerings also crumbled while safe-havens like bonds and utilities gained. The number of index members making new 52-week lows also jumped to the highest level since March 2020, according to TradeStation analytics. The total above their 200-day moving averages dipped to the fewest since July 2020.

Strong economic data may be fueling the caution. Last week had better-than-expected manufacturing and services data from the Institute for Supply Management. ADP’s private-sector payrolls report and initial jobless claims beat estimates. The government’s important non-farm payrolls report missed, but some economists saw potential anomalies in the data. They pointed to lower-than-expected unemployment and the 82,000 positive revision to September and October, concluding that statisticians are missing gains in the job market.

While such strength is typically positive, it could give the Fed leeway to taper stimulus. Sometimes “good news” is bad for stocks.

Growth Stocks Crumble

Last week was also noteworthy because sellers hit many large-cap growth stocks that previously held firm. Netflix (NFLX) broke its 50-day moving average for the first time since April. Salesforce.com (CRM) had its biggest weekly drop since February. Meta Platforms (FB) broke its 200-day moving average for the first time since coronavirus swept the market March 2020.

Biggest Decliners in the S&P 500 Last Week
Etsy (ETSY)-21%
Enphase Energy (ENPH)-12%
DexCom (DXCM)-12%
Generac (GNRC)-12%
Twitter (TWTR)-11%
Source: TradeStation Data

Financials also declined for the third straight week, their longest negative streak since March 2020. Tighter monetary policy could flatten the yield curve, squeezing bank profits.

The best-performing parts of the market were mostly non-tech areas like utilities, real-estate investment trusts and homebuilders. Semiconductors and computer hardware were the main exceptions thanks to strong demand and lower multiples.

Inflation will likely remain in focus with the government’s consumer price index on Friday. There’s also a big Fed meeting next week (on December 15).

Charting the Market

The S&P 500 has returned to its early September high and 50-day moving average. The index has struggled after peaking at an old trendline, potentially suggesting that old support has become new resistance.

The Dow Jones Industrial Average fared worse, testing its 200-day moving average for the first time in over a year.

The “fear index” has also been rising. Cboe’s volatility index (VIX) ended last week at its highest level since January. Traders may use the VIX to gauge market sentiment and exercise caution if it climbs further.

S&P 500, daily chart, showing key technical details.

The Week Ahead

This week’s agenda has a few earnings, although inflation and the Fed could dominate sentiment.

Crude oil inventories are due Wednesday morning. Initial jobless claims follow on Thursday, along with results from Broadcom (AVGO) and Costco (COST) in the afternoon.

The Bureau of Labor Statistics’ CPI report comes at 8:30 a.m. ET on Friday morning. Consumer sentiment follows at 10 a.m.


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