MANHATTAN (CN) — A series of gains early in the week for Wall Street were wiped out on Friday, one of the worst days of the month, as the Federal Reserve’s focus on inflation has investors dismayed.
On Friday, the Dow Jones Industrial Average — which had gained 500 points on Tuesday and another 200 on Wednesday — fell a whopping 979 points, leading to a 638-point weekly loss. The S&P 500 and Nasdaq also failed to capitalize on early gains, losing 121 points and 512 points for the week, respectively.
“The combination of Jerome Powell’s comments and some disappointing earnings news was too much for investors to handle heading into the weekend,” said John Lynch, chief investment officer at Comerica Wealth Management. “Moreover, market-based breakeven inflation expectations are climbing, providing a more powerful statement on the potential for persistent pricing pressures than headlines have been suggesting.”
Early in the week, investors were focused on corporate earnings, where cracks have started to show.
“So far, earnings are beating estimates by 9% with 75% of companies besting street guesses,” James Vogt of Tower Bridge Advisors wrote in an investor’s note. “After starting the year with a Russian invasion, China Covid closures, worsening inflation, and skyrocketing interest rates, chalk this up as a win thus far.”
Vogt offered the proviso that earnings are backward looking. “These earnings reports are important but do not contain much information with respect to six to nine months down the road,” he wrote. “The future is still cloudier than ever.”
Netflix, which had flourished during the early days of the Covid-19 pandemic, floundered in its latest earnings report, stating that it had lost 200,000 subscribers during the first quarter of 2022 — the first time in more than a decade that the company has seen its subscribers decline.
The streaming service company’s first-quarter profits also fell slightly, from $1.7 billion during first quarter of 2021 to just shy of $1.6 billion in the first quarter of this year. Netflix’s earnings per share also had dropped over that same period, from $3.60 per share this year’s first quarter versus $3.85 per share in the first quarter last year.
Other companies have issued mixed-bad earnings. In its earnings report, American Express posted a 6% loss in net income last quarter, at $2.2 billion compared with $2 billion in the first quarter of 2021.
On the flip side, airline stocks soared in the first quarter. American Airlines on Thursday reported that its total revenue beat analyst expectations by more than $500 million, though it posted a $1.6 billion first-quarter net loss. The company’s second-quarter forecast is very strong, though, with predictions business travel revenue will hit 90% of 2019 levels.
Based on the anticipated resurgence in travel next quarter, United Airlines also forecast a profit this year — the first time the company has posted a profit since the Covid-19 pandemic struck the United States in early 2020. The airline posted a $1.4 billion loss during the first quarter of 2022, but its passenger revenue is now nearly three times higher than it was during the first quarter of 2021.
“The demand environment is the strongest it’s been in my 30 years in the industry — and United and its customers will benefit more than any other airline,” said CEO Scott Kirby. “We’re now seeing clear evidence that the second quarter will be an historic inflection point for our business.”
The other news, though hardly surprising, dealt with the Federal Reserve’s hawkish approach to interest rates. On Thursday, Fed Chair Jerome Powell told the International Monetary Fund that easing inflation was “absolutely essential” that the central bank was debating a 50-basis-point interest rate hike at its next meeting in May.
“It’s absolutely essential to restore price stability, economies don’t work without price stability,” Powell said, and, while he conceded “it is going to be very challenging” in getting rates down, Powell said the Fed’s biggest objective now is getting inflation back to under its 2% goal.
“It is appropriate, in my view, to be moving a little more quickly” than the last tightening cycle, Powell said. He added that, “I also think there is something in the idea of front-end loading whatever accommodation one thinks is appropriate, so that points in the direction of 50 basis points being on the table.”
Following Powell’s comments, equity markets predictably dropped, giving up earlier gains, while bond yields jumped. By Friday, the yield on the 10-year Treasury had inched up towards 3%.
Some members of the Fed continue to vocally push for a more hawkish approach to interest rates, including St. Louis Federal Reserve President James Bullard, who had called for the federal funds rate to hit 3.5% by the end of 2022. Other members of the central bank are willing only to go so far as 2.4%, which is the Fed’s neutral estimate for rates.
Some experts say recent data points to inflation beginning to peter out. Andrew Hunter, senior U.S. economist at Capital Economics, noted in an investor’s note that declining job postings on Indeed.com is an encouraging sign that companies are more able to fill their vacancies, which in turn is “reducing the upward pressure on wages.”
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