MANHATTAN (CN) — Following five weeks of constant gains, Wall Street dropped significantly as bullish investors are turning bearish again about interest rate cuts in the fall.
Wall Street had hoped blockbuster earnings from Nvidia — the artificial intelligence company’s revenue for the first quarter clocked in at $26 billion versus the forecast of $24.6 billion — would help right the ship, but it was not to be.
“Markets tend to take a breather heading into a long holiday weekend,” said Jamie Cox, managing partner at Harris Financial Group. “The Fed minutes provided the catalyst and not even Nvidia could refocus markets on the positives.”
The Dow Jones Industrial Average saw its biggest losses in the middle of the week and failed to regain much ground by the closing bell Friday, dropping 934 points for the week. The S&P 500 and Nasdaq had middling weeks but ended avoiding losses, gaining one point and 285 points for the week, respectively.
The drop in stocks follows the see-saw pattern on Wall Street based on any inkling of the Federal Reserve’s next move. “Once again, we’ve seen investors stampede from one end of the Fed spectrum to the other,” wrote Tom Essaye of the Sevens Report, noting investors were assured in April of further rate hikes until Fed Chair Jerome Powell said they were off the table.
Now the pendulum has swung the other way, Essaye writes. “Expecting a guaranteed rate cut in September is only slightly less foolish than expecting rate cuts from the Fed,” he wrote, adding the Fed’s releases this week helped pop that bubble.
On Wednesday, the central bank released its minutes from the Federal Open Markets Committee’s end-of-April meeting. The minutes were largely unchanged from previous releases, and solidified experts’ belief that the central bank is in a holding pattern until the fall.
“The bottom line, ‘play it by ear’ is the stance of monetary policy right now,” wrote Peter Boockvar, chief investment officer at Bleakley Financial Group on Wednesday.
However, a few nuggets from the minutes were spooky for investors, including the statement that “various participants mentioned a willingness to tighten policy further should risk to inflation materialize in a way that such an action became appropriate.”
Paul Ashworth, chief North America economist at Capital Economics, wrote in an investor’s note that it was unclear how many members of the Fed think rates should go up. “The deliberate use of the nonquantifiable ‘various’ leaves us unclear whether this was just a fringe view on the FOMC or whether it enjoyed majority support,” Ashworth wrote.
He noted that while the April employment data were good, but “it will take at least several more months of better data before officials would have the confidence to cut rates, which we don’t think will happen before September.”
On Friday, the monthly University of Michigan survey echoed those concerns, with the survey showing a significant drop in sentiment from 77.2 points in April to 69.1 this month. Consumer expectations saw a similar drop, with the index falling to 68.6 points from 76 last month.
“Strength in household incomes has been the primary source of support for robust consumer spending over the past couple of years, so a softening in labor market expectations is concerning, and if it continues may lead to a pullback in consumers’ willingness to spend,” said survey Chief Economist Joanne Hsu in a statement.
The survey has found rising interest rates have played a major part in the dropping confidence, as it has made auto and home purchases more difficult. Hsu warned that consumers expect interest rates to remain high, “which will make it even more difficult for consumers to make large purchases.”
Economists also note there are no red flags — yet — of an impending recession over the next year. “Near-term recession risks remain exceedingly low,” wrote Matthew Martin at Oxford Economics in a note. “Sentiment and economic data tend to send the strongest signal at turning points, and both remained healthy during the month.”
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