Jerome Powell Says, “Hold My Beer,” Stocks Head Lower Again

Fed Chairman Jerome Powell

Stocks fell this morning as the rally fizzled. The market rocketed higher last Friday, sending bullish signals to dip-buying traders. Now, though, stocks have entirely given up their gains from last week. The Dow, S&P, and Nasdaq Composite all entered bearish trend continuations earlier this morning as a result.

Home retailer Restoration Hardware (NYSE: RH) issued a warning to shareholders before the market opened today, saying that the company would miss its full-year profit target. RH shares plummeted 9% in response, dragging industry peers Wayfair (NYSE: W) and Williams Sonoma (NYSE: WSM) lower as well.

“With mortgage rates double last year’s levels, luxury home sales down 18% in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year,” said Restoration Hardware CEO Gary Friedman.

Cruise line shares also sunk this morning after Morgan Stanley slashed its price target on Carnival (NYSE: CCL) in half. Bank analysts even went so far as to say that CCL could “go to zero.”

CCL tumbled 6% through noon.

Collectively, this cast a pall on the general market, which found itself in an already vulnerable state following a strong Tuesday selloff that gouged the S&P for a loss of more than 2.00%. Further downgrades and profit warnings threaten to take the major index lower still.

“We do not believe the stock market has bottomed yet and we see further downside ahead. Investors should be holding elevated levels of cash right now,” said Sanders Morris Harris chairman George Ball.

“We see the S&P 500 bottoming at around 3,100, as the Federal Reserve’s aggressive, but necessary inflation-fighting measures are likely to depress corporate earnings and push stocks lower.”

S&P 3,100 would represent another drop of about 18% for the index, which is already down over 20% on the year. And though the market’s recent short-term bump was largely driven by increased odds of a rate hike halt, it seems investors are getting more worried that the coming recession could be “the big one.”

That’s evidenced by Treasury yields, which slid alongside stocks today. The 10-year Treasury yield dipped below 3.00% this morning. Last week, that would’ve been seen as a major buy signal.

But the narrative is starting to shift. Over the last few days, Fed officials have repeatedly claimed that the Fed would raise rates no matter what happens to the economy. That includes Fed Chairman Jerome Powell.

“Is there a risk we would go too far? Certainly, there’s a risk,” Powell said yesterday at the European Central Bank’s annual economic policy roundtable conference.

“The bigger mistake to make — let’s put it that way — would be to fail to restore price stability.”

That’s the right move, of course. But will Powell actually have the fortitude to pull it off?

Last Friday, traders answered with a resounding “no” by sending the S&P over 3.00% higher on the day.

Market attitudes have changed significantly since then, however.

And so, volatility should continue until investors get more clarity on the matter. That probably won’t happen until either the next Consumer Price Index release (July 13th) or FOMC meeting (July 23rd).

My advice to traders?

Give your stops some more room to breathe than normal, because the ride should only get bumpier from here as sentiment flip-flops on whether Powell will hike rates like he needs to.


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