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US stocks plummeted on Friday, extending this week’s selloff as market participants digested a fresh batch of corporate earnings reports and braced for more aggressive monetary policy tightening by the Fed than originally expected. Meanwhile, the benchmark 10-year Treasury yield hovered around 2.9%, the highest level since December 2018. 

Markets Today

  • S&P 500 (SPY): -2.74%
  • Nasdaq (QQQ): -2.62%
  • Dow Jones (DIA): -2.71%
  • Russell 2000 (IWM): -2.59%
  • Volatility Index (VIX): +24.38%
  • Apple (AAPL): -2.78%
  • Alphabet (GOOG): -4.26%
  • Shopify (SHOP): -4.37%
  • Twitter (TWTR): +3.44%
  • JP Morgan (JPM): -2.87%
  • Occidental Petroleum (OXY): -4.36%
  • Alcoa Corp (AA): -6.69%

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The losses follow remarks from Federal Reserve Chair Jerome Powell that signaled a 50 basis point hike to the interest rate was coming next in the next meeting, spooking investors. In particular, Powell said members of the Central Bank were committed to “front-loading” interest rate hikes in order to fight the fastest pace of inflation in over forty years. 

Addressing European Central Bank President Christine Lagarde and other officials on Thursday, Powell said the Federal Reserve was committed to getting 2% inflation back, referring to the Fed’s target for annual price increases.

The Fed’s aggressive policy shift comes as the US economy stares down the barrel of a recession if inflation continues rising as growth stagnates. While the labor market remains strong, a broken supply chain, the war in Ukraine, rising prices, and slowing economic growth threaten the post-COVID economic recovery.

Quincy Krosby, chief equity strategist at LPL Financial, said “Today’s market action reflects the power of Jerome Powell’s comments yesterday, that the Fed is determined to slay climbing inflation and virtually acknowledging that the market can expect a 50 basis point hike in May.”

With the headline Consumer Price Index at its highest level in four decades, the Federal Reserve has now choice but to aggressively tighten to rein in rising price levels. That said, there is rising fear that the Fed may act too aggressively when rising rates, plummeting the US into a recession regardless. Earnings season, which has so far been mixed, will be a key indicator whether the broader economy can sustain the incoming tightening cycle. 

Deepak Puri, Chief Investment Officer at Deutsche Bank, said “The big question is whether the earnings can really sustain this kind of a macro backdrop of slower growth and Fed policy. It seems certain companies can — historically that’s been the case. What’s different this time is really the trifecta, which is higher costs of capital, quantitative tightening, plus a lack of … a big fiscal stimulus.”

Despite worries from Wall Street and the Fed’s aggressive signal, there are some signs that we are at, or at least, approaching peak inflation. The Fed’s Beige Book, which is a region-by-region roundup of economic information from each of the Federal Reserve’s districts, showed economic activity increased at a “moderate pace” in most of its twelve districts between February and mid-April. 

The Beige Book said, “”Strong demand generally allowed firms to pass through input cost increases to customers, for example, via fuel surcharges for freight and airline fares. However, contacts in a few districts noted negative sales impacts from rising prices. Firms in most districts expected inflationary pressures to continue over the coming months.”

Highlights

  • S&P Global’s Flash Composite Purchasing Managers’ Index, which serves as a measure of overall economic health, fell to a reading of 55.1 this month from 57.7 in March. Economists surveyed by Bloomberg expected a reading of 57.9. Any reading above 50 indicates growth in the private sector.
  • Florida Gov. Ron DeSantis on Friday signed a bill to end Disney’s (DIS) special district designation on its theme parks.  Currently, under Florida law Disney can regulate its own power, water, and emergency services.
  • Starbucks (SBUX) is going on the offensive against a nationwide wave of unionization, calling out the Starbucks Workers United (SWU), the labor organization backing pro-union workers, for allegedly breaking labor rules amid a recount of unionization vote at an Upstate New York location.
  • ll reveal how the consumer-electronics giant is managing supply-chain and macroeconomic pressures, but it should also contain the company’s annual update on its capital-return plans and could be the “most incremental potential positive” element of Apple’s entire report, according to Wells Fargo analyst Aaron Rakers. The company continues to be a cash-generating machine, and with its shares only yielding about 0.5%, Rakers expects that Apple could add at least $90 billion to its buyback program and raise its dividend by upward of 10%
  • Cathie Wood’s Ark Invest this week snapped up shares of pandemic darlings including Roblox (RBLX), Roku (ROKU), and Zoom (ZM) that have fallen out of favor this year. Her flagship fund ARKK has lost about 30% of its value in 2022.
  • In the week through April 20, investors pulled $19.6 billion from U.S. large caps, the largest exit since February 2018, the strategists wrote in a note dated Thursday, citing EPFR Global data. The outflow from broader U.S. equity funds was the biggest since December.
  • Alphabet Inc’s Google is investing in its first ever Africa product development center in the Kenyan capital Nairobi, it said, as it positions itself to serve a growing base of internet users on the continent.

“A gem cannot be polished without friction, nor a person perfected without trials.” – Seneca