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Dow Records Biggest Daily Loss Since May

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Stocks plunged last Wednesday as Chairman of the Federal Reserve Jerome Powell closed hopes that further cuts on rate will happen on the latter part of the year.

The Dow Jones Index ended by 333.75 points or 1.2% lower, at  26,864.27 after diving around 478 points some point. Meanwhile, the S&P 500 slipped by 1.1% to finish at  2,980.38. The Nasdaq also slid 1.2% or to 8,175.42.

The Dow Jones Industrial Average recorded its biggest daily loss since May 31 same with S&P 500. Nasdaq, on the other hand, had its most significant one-day slide since the last part of June.

Federated Investors’ senior portfolio manager, Don Ellenberger, said that the stock market appeared to be dismayed with the performance of Powell. Perhaps, the disappointment is due to Powell not suggesting that it was a ‘one-and-done cut.’ There’s also no implied meaning that a September cut is possible.

The Fed sliced rates by 25 basis points, equal to the expectations of the market. The central bank attributed the easing of monetary conditions to global advancement and muted inflation.

However, Powell said to reporters, succeeding the decision of Federal Open Market Committee, that the central bank’s rate reduction is a mere mid-cycle adjustment. Thus, signaling that rate cuts in the latter part of the year is not guaranteed. 

Powell added that this event leads back to related instances when FOMC has sliced rates during the middle of a given cycle. The Fed chairman said that he is comparing it with the start of a long cutting cycle. He added that it is now what they see at the moment, and it is not their perspective. Powell stressed that one should look not only at the 25 basis-point cut but also consider the committee’s actions throughout the year.

The Fed chairman noted that they started the year anticipating some increases on the rate. They’ve diverted to a patient setting for a couple of months before they moved to where they are. He added that as they transition to higher accommodative policy, the performance of the economy turned out to be what was expected with the incremental rise in support.

Those statements sent the number to their most significant drops of the day, headed by momentum stocks such as Amazon and Microsoft. The U.S. dollar, meanwhile, notches its highest level after two years compared to an array of currencies. Lastly,  the U.S.10-year Treasury yield rose at 2.07% before sinking back at 2.02%.

Mike Collins, PGIM Fixed Income’s senior portfolio manager, said that their entire story revolved on the market’s pricing of two situations. He noted that the market is valuing in 70% possibility of two rate slices,  i.e., a midcycle adjustment plus a soft landing, and a 30% likelihood that rate cuts would be zero. He said that it would be the commencement of a rate-cut cycle since we’re moving to a recession. The markets are inclining on the former and discouraging the latter scenario.

However, Powell did suggest this rate move was not sure as a ‘one time, big time.’

AmeriVet head of U.S. rates, Gregory Faranello, said the Powell corrected himself. This is because the market is interpreting his statements to imply that the Fed was a one and done. In the end, this wouldn’t go anywhere rather than attracting a mark in volatility.

Faranello added the trends that affect the most are already in place. The dollar is higher, equities are lower, and the yield curve is stagnant. He stressed that what is happening is a pain trade, and what lies moving forward is clearly uncertain. Lastly, the AmeriVet head noted that the thought of future cuts is available, but he doesn’t think that it is a no-brainer at the extent of his imagination.

The rate cut happened amidst mixed financial data. The economic growth of the U.S. slacked off in the second quarter at 2.15, although it is still better than what was anticipated.

 Alpine Macro’s chief U.S. strategist, David Abramson, stated in a note that Fed has surrendered to fainter economic growth. While inflation is leading lower, a recession is unlikely to occur.

The major indexes notched substantial monthly gains even after the dip last Wednesday. The Nasdaq and S&P 500 increased 2.1% and 1.35 respectively last July. The Dow recover by 1% the current month.