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- Josh Billings

MARKET PERFORMANCE

PORTFOLIO MANAGER COMMENTARY

Stocks sold off sharply Tuesday after comments from Federal Reserve Chair Jerome Powell suggested that rates may need to go higher for longer, fueling fears of a potentially larger hike at the central bank’s next policy meeting. As the major stock indexes fell, the 2-year Treasury yield jumped to its highest level since 2007 at 5%. Tuesday’s selloff brings the Dow into negative territory for 2023, down about 0.9%. The S&P and Nasdaq are up about 3.8% and 10.2%, respectively, for the year.

Powell’s remarks could also mean that the peak rate for federal funds, also called the terminal rate, will likely go higher than previously expected, despite investor hopes that the Fed might stop hiking soon. “This isn’t surprising news, but it’s a tough reminder for markets after such a brisk rally,” said eToro U.S. investment analyst Callie Cox. 

Bank shares led the losses as investors feared more rate hikes will tip the economy into a recession. Wells Fargo lost 4.7%. Bank of America, Goldman Sachs, and JPMorgan Chase lost about 3% each. Mega-cap tech stocks also tumbled, with Apple, Alphabet and Microsoft falling at least 1% each.

In contrast, airline stocks avoided the market downtrend after the Justice Department sued to block JetBlue’s acquisition of Spirit Airlines. The announcement reduced some investor fears that a combined airline would heighten competition. United Airlines rose 3%. Delta and American gained 1.6% and 1.5%, respectively.

CHART OF THE DAY

The economy’s recent pickup will delay Fed officials’ considerations about when to pause rate increases. Earlier this year in January, data showed moderate economic declines that gave some hope Powell may pause rate hikes in the short-term. Much of the uncertainty over when and how much economy will slow is due in large part to Mr. Powell’s decision to raise interest rates rapidly. The Fed previously spaced out increases, such as in the periods 2004 to 2006 and 2015 to 2018, when lower inflation allowed officials to move more gradually. Now, the downsides of rapid rate hikes are coming into view. “If you front-load hikes, it makes it harder to tell whether you need to wait a little longer to see the effects, or whether the economy is just more resilient,” MIT Professor Kristin Forbes said.

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