What's Driving the Markets Down?
Here is a summary of the three major headwinds facing the financial markets:
The Federal Reserve Board is dealing with the extraordinary large cash infusion put into the system by Congress to alleviate the pandemic shutdowns. This increase in money supply was a major contributor to inflation. The Fed’s hawkish policy change can be witnessed by the upward changes in the Fed Funds rate, among other Fed tools. So far in 2022, the Fed Funds rate has been increased by 0.75% three times, along with two 0.50% increases. Even with the Fed’s restrictive monetary policy, inflation has not begun to decline. This is spooking investors because the Fed’s announcements have been clear, the Fed will continue to stay the course of its restrictive monetary policy is to bring inflation down to a 2% target level.
The U.S. dollar is swiftly gaining strength from the rising rates. This makes American goods and services more expensive overseas, which puts downward pressure on American companies’ corporate earnings. The strong dollar is pushing other currencies lower, this causes foreign investors to seek the safe haven of U.S. Treasury bonds. The demand for U.S. Treasuries is driving yields up and making bonds more attractive. Stocks and bonds compete for the same investors. When bonds become more attractive, investors are compelled to sell equities and purchase bonds. This creates downward pressure on equities.
Corporate earnings are expected to decline in the 3rd and 4th quarters, as announced by many publicly traded company executives in recent earnings meetings. A stock investor purchases a stock to participate in the earnings growth of a company. When the outlook is not optimistic, this diminishes demand for the stock which puts downward pressure on its price. For example, FedEx recently said its earnings forecast is significantly below previously announced expectations which it announced in June, and it withdrew its full fiscal year 2023 forecast. This after-hours announcement sent its stock (FDX) down 21% on the next trading day.