Stocks drop for second day, Nasdaq slips another 2% as Fed gives policy tightening plans

Stocks fell for a second day on Wednesday and rates hit new highs after the Federal Reserve gave more guidance on how quickly it will tighten monetary policy to fight inflation, raising fears of a downturn in the economy.

The Dow Jones Industrial Average fell 144.67 points, or 0.42%, to 34,496.51. The S&P 500 slipped 0.97% to 4,481.15, and the Nasdaq Composite fell another 2.22% to 13,888.82 after falling about 2.3% on Tuesday.

“It was a warning to anyone who thinks the Fed is going to be more dovish in its fight against inflation,” said Quincy Krosby, chief equity strategist at LPL Financial. “Their message is, ‘You’re wrong’.”

The Fed’s release of the minutes of its meeting on Wednesday afternoon said officials were “generally in agreement” with it cutting its balance sheet by $95 billion a month. The minutes also showed that central bank officials were considering rate hikes bigger than the usual increases of 25 basis points, or a quarter of a point. Shares fell to session lows after the minutes were released, but rebounded slightly to end the day.

“Many participants noted that – with inflation well above the Committee’s target, inflationary risks on the upside, and a federal funds rate well below participants’ estimates of its longer-term level – they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting,” the minutes read.

Meanwhile, the 10-year Treasury yield jumped above 2.65% to a three-year high on Wednesday and remained near that high after the Fed meeting minutes were released. The rate ended Monday at 2.40%. The minutes were from the Fed’s March meeting where it hiked rates a quarter point and said six more hikes of that magnitude were coming this year.

“I think the stock market is starting to think that $60 billion in Treasuries and $35 billion in mortgages are starting to get real,” said James Caron of Morgan Stanley Investment Management. “If they do another 50 basis point hike in May and another 50 basis points in June, it starts to get more real. It’s definitely not a tailwind for stocks.”

Tech stocks led Wednesday’s slide, falling again for a second day as investors exited the pack and braced for higher rates to slow the economy. Apple, Microsoft, Amazon and Tesla contributed to the industry’s decline. Chipmakers like Nvidia and Marvell Technology also continued their descent, falling around 5.9% and 2.6% respectively.

Investors continued to seek stocks with stable earnings, avoiding those offering future growth. The utilities, health care and consumer staples sectors continued to climb on Wednesday, with Amgen and Johnson & Johnson rising more than 2% each. Consumer staples such as Coca-Cola and Procter & Gamble rose more than 1%. Walmart jumped 2.3%.

“Today and yesterday you’re really starting to see the equity market catching up with the bond market,” said Chris Zaccarelli, CIO at Independent Advisor Alliance. “And by that, I mean stocks are starting to appreciate in a more aggressive Fed. You start to see an offer of safety, you see that classic risk-taking move.”

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In recent days, officials have tried to warn investors that an even faster policy tightening may be ahead. The findings, coupled with recent remarks from Fed Governor Lael Brainard and others, seemed to signal that sentiment.

Earlier Wednesday, Philadelphia Federal Reserve Chairman Patrick Harker said he was “extremely concerned” about rising inflation, noting that he expects “a series of deliberate and methodical hikes as the year goes on and the data evolves.”

His comments come less than a day after Brainard signaled support for higher interest rates and said a “rapid” reduction in the central bank’s balance sheet could come as early as May. The remarks pushed stocks lower in the previous session.

“Getting inflation down is of paramount importance,” Brainard said during a Minneapolis Fed webinar. San Francisco Fed President Mary Daly echoed similar sentiments toward inflation on Tuesday.

“What this means for markets is continued volatility around the uncertainty of higher rates and lower income stocks, with growth-type stocks likely continuing to be discounted as rates rise,” he said. said Cliff Corso of Advisors Asset Management on CNBC’s “Worldwide Exchange.” “

Upcoming earnings

Traders were also preparing for the start of corporate earnings season on Wednesday.

Goldman Sachs chief U.S. equity strategist David Kostin told CNBC’s “Squawk on the Street” on Wednesday that stocks with “resilient margins” are better prepared to weather the current environment. This includes names such as Alphabet and Nike – which have maintained “high and stable margins” even amid the pandemic, he said.

“Overall, the US stock market is maybe 5% up from these values ​​by the end of the year,” Kostin said. “If we go into a recession, it will be a significant drop, but that’s not the base case at the moment.”

CNBC’s Patti Domm and Jeff Cox contributed reporting

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