The three major US equity indices - the Nasdaq Composite, the S&P 500 and the Dow Jones Industrial Average - ended the week up between 1% and 2%, replicating last week’s rebound that came after four straight weeks of selling.
Like the previous week, it was a rollercoaster one for stocks. Trading began on a strong note but turned into horror by Thursday with the dismal quarterly earnings of Facebook’s parent Meta Holdings, which wiped out more than 25% from the company’s stock price and $200 billion from its market value. Facebook’s plunge also handed Nasdaq a 3.7% loss, the index’s worst in a day since October 2020.
Then on Friday, the US government released its estimates - beating non-farm payrolls report for January that cited 467,000 new jobs - well above November’s growth of 199,000 and smashing economists’ expectations for just 125,000 last month. Instead of being assured, investors found the report adding to their anxieties about impending US rate hikes. As a result, the Nasdaq, S&P 500 and Dow all plunged in morning trading before finding their feet later for a positive finish.
As the week closed, the consensus among analysts was that investors were still way off from their comfort zone of months ago where hundreds of billions of dollars of monthly stimulus support by the Federal Reserve and pandemic relief provided by the government repeatedly sent stocks to record highs.
Until the Federal Reserve announces its first pandemic-era rate hike, now widely expected to be in March, trading in equities was likely to remain in flux, they said.
"The next couple of months should be very choppy for equity markets as Fed tightening certainty will clearly take a cue from how quickly supply chain issues improve," said Ed Moya, an analyst at online trading platform OANDA. "The Fed clearly is rushing to fix their mistake in tackling inflation and that surging global bond yield environment will make it tough for risky assets. Selling into rallies may not become the dominant theme, but it is hard to imagine investors will be aggressively bullish here."
A reading on money market expectations on Friday showed the Federal Reserve could hike rates by as many as five times this year as an extraordinary labor market creates a solid case for the central bank to be aggressive in fighting inflation.
After staggering unemployment triggered by the Covid-19 outbreak in 2020, the US labor market has picked up dynamically, showing a jobless rate of just 4.0% in the January non-farm payrolls report released on Friday — versus a record high of 14.8% in April 2020. An unemployment rate of 4.0% or lower is considered as "maximum employment" by the Federal Reserve, which has a dual mandate of growing jobs and keeping inflation under control through interest rate controls.
Since slashing rates to nearly zero in March 2020, the Federal Reserve has provided stimulus of more than $2 trillion over the past 20 months to sustain credit markets. On top of that, the federal government spent trillions of dollars more on pandemic relief measures, while employers paid out higher wages to working Americans.
All that money, along with supply chain bottlenecks arising from the pandemic, have created soaring inflation. The economy grew 5.8% last year from a 3.5% contraction in 2020. But the US Consumer Price Index, a key barometer for inflation, jumped 7% in the year to December, growing at its fastest since 1982. The Fed’s own tolerance for inflation is a mere 2% a year.
Money markets expect the Federal Reserve to begin with a 25-basis point or quarter percentage point rate hike and perhaps even double the quantum later, depending on the performance of the labor market, the economy and, ultimately, inflation.