U.S. stocks higher near midpoint of volatile session on Powell tightening signal


U.S. stocks ended higher Friday after Federal Reserve Chairman Jerome Powell warned the central bank may need to raise interest rates even higher to temper a strong U.S. economy and quell inflation, while assuring investors that monetary policy would proceed cautiously.

How stock indexes traded

  • The Dow Jones Industrial Average DJIA rose 247.48 points, or 0.7%, to close at 34,346.90
  • The S&P 500 SPX gained 29.4 points, or 0.7%, to finish at 4,405.71.
  • The Nasdaq Composite COMP advanced 126.67 points, or 0.9%, to end at 13,590.65.

For the week, the Dow fell 0.4%, the S&P 500 gained 0.8% and the Nasdaq climbed 2.3%, according to Dow Jones Market Data. The Dow booked back-to-back weekly losses, while the S&P 500 and technology-heavy Nasdaq Composite each snapped a three-week losing streak.

What drove markets

Federal Reserve Chair Jerome’s Powell’s message to investors during Friday’s Jackson Hole speech was that still too high inflation may warrant more interest rate hikes as he keeps a careful eye on incoming economic data.

The Fed’s “staying restrictive” with its monetary policy, said Kevin Gordon, senior investment strategist at Charles Schwab, in a phone interview Friday after Powell’s speech. His remarks leaned “hawkish” in suggesting that interest rates could stay higher for longer as the central bank aims to bring inflation back down to its 2% target in a still tight labor market, said Gordon.

Traders are largely expecting the Fed will hold rates steady in September, but see a chance of another interest rate hike in November or December, according to the CME FedWatch Tool, at last check. Federal-funds futures were indicating a 49.9% probability of a quarter point hike to 5.5% to 5.75% at the Fed’s November meeting, and a slightly lower chance of such a hike to that same range in December.

Meanwhile, stocks are continuing to adjust to bond-market volatility, said Gordon, pointing to the burst higher in Treasury yields in August.

On Friday, two-year Treasury yields BX:TMUBMUSD02Y rose 3.8 basis points to 5.054%, while 10-year yields BX:TMUBMUSD10Y were little changed at 4.239%, according to Dow Jones Market Data. Bond yields move inversely to prices.

Investors may be expecting Powell to follow through with his promise to cool the economy, according to Joe Ferrara, investment strategist at Gateway Investment Advisers.

“He’s saying the job isn’t done yet,” Ferrara said during a phone interview with MarketWatch. “It seems that the economy is running a little too hot for him, so I think that is slightly more hawkish than dovish.”

Although inflationary pressures have eased, Powell noted that core price pressures remain well above the Fed’s 2% target. The increase in core inflation measured by the consumer-price index over the past year through July slowed to 4.7%.

Others contrasted Friday’s Jackson Hole speech with Powell’s remarks from last year, when he took the market by surprised and triggered a more than 3% drop in the S&P 500 index.

“Was he hawkish, yes. But given the jump in yields lately, he wasn’t as hawkish as some had feared, said Ryan Detrick, chief market strategist at Carson Group, in emailed commentary. “Remember, last year he took out the bazooka and was way more hawkish than anyone expected, which saw heavy selling into October. This time he hit it more down the middle, with no major changes in future hikes a welcome sign.”

In July, the Fed raised its policy rate by a quarter percentage point to a target range of 5.25% to 5.5%, the highest in 22 years.

In U.S. economic data released Friday, a final reading on the University of Michigan’s U.S. consumer sentiment index ticked lower to 69.5 in late August, a sign that consumers’ outlook for the economy has softened.

See: Consumer sentiment dips at end of August on more worries about the economy

Steven Wieting, chief economist and chief investment strategist at Citi Global Wealth, said by phone Friday that in the U.S. he’s overweight bonds relative to equities while expecting gross-domestic-product growth of 1.8% next year.

“We’re not putting new money to work chasing up the ‘Magnificent Seven’,” said Wieting, referring to the megacap stocks also known as Big Tech that have seen a massive rally this year. That group of seven stocks, which includes companies like Apple Inc. AAPL, +1.26% and Nvidia Corp. NVDA, -2.43%, represent a heavy weight in the S&P 500. 

Earlier this week, “we just added a position” to the equal-weight version of the S&P 500, said Wieting, citing its large discount to the capitalization-weighted index.

“I see record high concentration risk in the U.S. stock market,” he said. The huge rally in megacap tech stocks this year has “left too many other shares behind.”

Read: Mutual funds struggling with record underweight in megacap tech stocks, says Goldman Sachs

Companies in focus

Steven Goldstein contributed to this article

This article was originally published by Marketwatch.com. Read the original article here.

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