Stocks fell this morning as inflation expectations rose. With the December FOMC meeting approaching on Wednesday, many analysts expected that the major indexes would remain “coiled” until then.
Instead, equities sunk today while reopening-sensitive stocks endured the worst of the selling. American Airlines (NASDAQ: AAL) and Carnival Corp (NYSE: CCL) both dropped over 6%.
Drugmakers, on the other hand, rocketed higher in response to rising Covid Omicron variant fears. Moderna (NYSE: MRNA) and Pfizer (NYSE: PFE) climbed more than 5% through noon.
But most investors are focused on Wednesday, when the 2-day December FOMC meeting begins. Wall Street believes that Powell will reveal an accelerated taper in his post-meeting remarks, doubling the current reduction in monthly asset purchases from $15 billion to $30 billion.
“Concerns are plentiful […] ranging from a market which recently rallied quickly back to record highs, to ongoing Covid concerns. But the elephant in the room today and perhaps for the next few days will be the Federal Reserve and just how hawkish a tone they adopt later this week,” explained Leuthold Group chief strategist Jim Paulsen.
“With the first Fed tightening imminently pending, investors are dumping anything but risk-off assets including defensive sectors within the stock market, large caps, bonds, and the safe-haven U.S. dollar. Until the Fed meeting and its press conference is over, investors should probably expect fears to keep pressure on the stock market.”
Goldman Sachs chief US equity strategist David Kostin thinks that the discounting has already begun.
“Both equity and fixed-income markets appear to be pricing the coming Fed tightening,” Kostin said in a note.
“Historical experience suggest equity valuations are typically flat around the first Fed hike. Moreover, some of the longest duration and highest valuation stocks plunged during the past month, suggesting that equity market pricing of Fed tightening is also under way.”
This morning’s correction worsened following the release of the New York Fed’s public short-term inflation expectations survey.
“Median inflation uncertainty — or the uncertainty expressed regarding future inflation outcomes — increased at both the short- and medium-term horizons, with both reaching new series highs,” the survey revealed, as the median inflation expectation (for one year from now) rose to 6%.
Some analysts don’t think inflation concerns will keep equities down for long, though. Mark Haefele, chief investment officer of UBS Global Wealth Management, said as much in a recent commentary on stocks.
“We believe markets can continue to take a higher inflation reading in their stride, though additional volatility remains a risk,” Haefele said.
“With Fed policy staying relatively accommodative, the backdrop for equities is still positive, and we favor winners from global growth.”
The S&P hit a new closing high on Friday. Today, the index almost touched its Friday low. But stocks still look capable of hitting new highs again should the Fed’s monetary policy not shift too hawkish for comfort.
Similarly, another correction could easily follow in the event that Powell disappoints bulls. Regardless of what happens, though, a big move should result – either up or down – as sentiment continues to whipsaw in anticipation of the Fed’s revised taper and rate hike schedule.