Shares resumed a downward trajectory today after a brief respite as markets digested a major rate hike by the U.S. central bank and comments by Fed chief Jerome Powell. A decisive Fed move to raise interest rates by three quarters of a percentage point boosted shares briefly Wednesday but optimism faded quickly with major indexes all down sharply.
The Dow is off more than 700 points, the Nasdaq and S&P 500 are down, respectively, 4% and 3.2% after the biggest rate hike since 1994. Powell said at a press conference that the Fed’s Open Market Committee could announce another similar raise at its July meeting (it upped rates by half a point last month) to try to tame soaring inflation, which is at a 40-year high.
Entertainment shares are taking a bath with Warner Bros. Discovery down 9%, among the hardest hit, as JP Morgan initiated coverage today with a ‘neutral’ rating and a price target of $22.
Paramount is off by 6%, Comcast by 5%. Netflix by 3%, Disney by 1.3%. BofA analyst Jessica Reif Cohen said in a note this morning that “recent macro volatility is starting to have an impact on the advertising market. While companies that spend into a recession often emerge stronger, the market is tepid due to advertiser concerns over labor shortages, inflation and supply chain issues.”
Tech is also hurting with Facebook parent Meta, Google parent Alphabet, Amazon, Apple, Snap and Spotify all lower.
Twitter is a rare stock in the green, up 0.55%. Elon Musk is reportedly set to address Twitter staff in an all-hands on deck virtual meeting later today as his will-he-won’t-he $44 billion takeover of the social media platform, while tortured, still seems be on the table.
The looming question is whether the Fed can engineer a so-called “soft landing” for the economy or if this series of interest rate hikes will trigger a recession.
Right now, Powell said, the central bank is targeting a federal-funds rate of 3.4% at the end of this year, of 3.8%, at the end of next year and a declines back to 3.4% in 2024. The Fed’s goal is to get inflation down to around 2%. In May, the 12-month change in the Consumer Price Index came in above expectations at 8.6%. Powell noted that some elements of inflation are beyond the Fed’s control like the surge in crude oil and food prices due to the Russia-Ukraine war and lingering supply chain glitches related to Covid-related shutdowns in China.
“Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%,” said, acknowledging that the 75-basis-point rate increase was “an unusually large one.”
“There’s always a risk of going too far or going not far enough. And it’s going to be a very difficult judgment to make, or maybe not. Maybe it’ll be really clear. But we’re quite mindful of the dangers. But I will say, the worst mistake we could make would be to fail, which it’s not an option,” he said.
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