The Major Indices Registered Sizable Declines This Week.
Softness in mega caps had a disproportionate influence on index performance, but there was no effort to rotate anywhere else so many stocks came along for the downside ride.
All 11 S&P 500 sectors finished in the red this week. The consumer discretionary (-6.4%), real estate (-5.4%), and materials (-3.7%) were the top laggards while the health care sector (-1.2%) saw the slimmest loss.
The catalyst for the weakness was another big jump in Treasury yields. The 2-yr note yield climbed eight basis points this week to 5.12%. The 10-yr note yield climbed 12 basis points this week to 4.44%. Including this week's move, the 10-yr note yield is up 35 basis points this month.
Those moves were largely in response to the Fed's hawkish pause on Wednesday.
As expected, the FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%. There were few changes to the directive itself, but the market was focused on the Summary of Economic Projections and dot plot, which conveyed two key takeaways: (1) Policy rates are anticipated to remain higher for longer and (2) Fed officials are not expecting to cut rates in 2024 as much as they were anticipating when they updated their forecasts in June.
The median fed funds rate estimate for 2023 was unchanged at 5.6%, but the median estimate for 2024 was 5.1%, versus 4.6% in June. The former estimate suggests officials are still leaning in favor of one more rate hike this year, whereas the latter revision connotes an expectation that rates will come down by only 50 basis points in 2024, as opposed to 100 basis points when estimates were provided in June. Meanwhile, the median estimate for 2025 was 3.9% versus 3.4% in June, and a median estimate of 2.9% was introduced for 2026. The longer-run fed funds rate estimate was maintained at 2.5%, leaving one to infer that the Fed is going to stay committed to its 2.0% inflation target.
Fed Chair Powell said several times at his press conference that the Fed is going to "proceed carefully" when thinking about making a policy move, but said it's plausible that the neutral rate is higher than the longer run rate (2.5%), which he said is part of the explanation for why the economy has been more resilient than expected.
The wrinkle for the market wasn't that the Fed is decidedly hawkish at this point, it was that the Fed is still not dovish.
More Fed officials echoed Mr. Powell's view later in the week, Specifically, San Francisco Fed President Daly (a 2024 FOMC voter), Fed Governor Bowman (FOMC voter), and Boston Fed President Collins (not an FOMC voter this year or 2024) all made similar comments on Friday.
Other central banks also made policy announcements this week. The Bank of England voted 5-4 to leave its bank rate unchanged at 5.25%; the Hong Kong Monetary Authority left its key rate unchanged at 5.75%; the Swiss National Bank left its key rate unchanged at 1.75%; the Bank of Japan made no changes to its policy stance; the Riksbank increased its key rate by 25 basis points to 4.00%; and the Norges Bank increased its key rate by 25 basis points to 4.25%.
In corporate news, there were two notable initial public offerings this week. Instacart and Klaviyo both traded above their IPO price after opening, but rolled over with the rest of the market by the end of the week.
The UAW extended its strike to all GM and STLA parts and distribution centers beginning at noon ET on Friday. This followed confirmation that the UAW made progress on labor talks with Ford, but indicated that Stellantis (STLA) and General Motors (GM) are going to need "serious pushing."
Nasdaq Composite: -3.6% for the week / +26.2% YTD
S&P 500: -2.9% for the week / +12.5% YTD
S&P Midcap 400: -2.8% for the week / +2.7% YTD
Dow Jones Industrial Average: -1.9% for the week / +2.5% YTD
Russell 2000: -3.8% for the week / +0.9% YTD