After a week of wild turbulence, stocks are likely to remain volatile as investors await fresh data on inflation and watch the course of bond yields. The three major indexes started the week with three straight positive sessions, then plunged in a sharp selloff after investors decided the Federal Reserve's implied policy tightening cycle ahead was still very hawkish, even as Chairman Jerome Powell took 75-basis point rate hikes off the table. In its biggest one-day loss in two years, the benchmark S&P 500 Index plunged 3.6% on Thursday, the Dow lost 1,063 points and the tech-heavy Nasdaq closed the session down 5%.
The S&P 500 index has now declined for five straight weeks, its longest streak since mid-2011, and closed at 4,123, down just .2% for the week. The Nasdaq lost -1.5% to close at 12,145 and is now down almost 25% from its record set last November. The DOW lost -.2% to 32,899 and the Russell 2000 lost -1.3% to 1,839. With all the volatility the market experienced, the CBOE VIX actually dropped -9.6% on the week to 30.19.
More volatility could be in store if this week's monthly consumer price index reading exceeds expectations, potentially propping up the case for even more aggressive monetary policy tightening from the Fed. The Fed raised its fed funds target rate by 50 basis points, the largest increase in 22 years, and signaled similar hikes are on the way. They also said it would start next month to reduce the roughly $9 trillion stash of assets accumulated during its efforts to fight the economic impact of the coronavirus pandemic as another lever to bring inflation under control. Markets will be closely watching Wednesday’s April consumer price index to see if it will impact the Fed’s future decisions. Economists expect another high inflation reading but most likely lower than the 8.5% year over year pace of March. The producer price index, which is a gauge of wholesale prices will be released Thursday.
The benchmark S&P 500 index is now down 13.5% year-to-date and valuations stand at their lowest levels in two years, putting the index's forward price-to-earnings ratio at 17.9 times from 21.7 at the end of 2021, according to the latest data from Refinitiv Datastream.
Higher yields in particular dull the allure of technology and other high-growth sectors, as their cash flows are often more weighted in the future and diminished when discounted at higher rates. The 10-year Treasury yield broke through 3% for the first time since November 2018 and on Friday hit a high of 3.13%, up from 2.94% a week earlier. The 10-year was approximately 1.5% at the start of the year. This has caused the forward P/E for the S&P 500 technology to decline from 28.5 times to 21.4 so far this year, according to Refinitiv Datastream.
