U.S. stocks moved slightly higher on Friday and the market headed for a losing week as investors braced for tighter monetary policy from the Federal Reserve.
The Dow Jones Industrial Average rose 250 points, or 0.7%, while the S&P 500 advanced 0.2% and Nasdaq Composite fell 0.4%.
The losses have been driven by a change of tone by the Federal Reserve, signaling it will act even more aggressively to fight inflation.
Tech stocks led Friday’s losses as investors dumped the riskier shares in anticipation of higher interest rates limiting the group’s future profit growth. Chipmakers like Nvidia and Micron, which have struggled amid supply chain shortages and concerns of a looming recession, dipped 3% and 1.5%, respectively, while shares of Tesla, Alphabet, and Apple inched lower.
UPS fell 1.5% on the back of a downgrade from Bank of America citing concerns about weakening demand and declining prices in the industry.
The health-care and consumer staples sectors rallied this week as investors worried about a slowing economy pivoted toward stocks with stable earnings. Merck, Home Depot and UnitedHealth Group inched higher again on Friday. Financial sector companies like JPMorgan Chase and American Express rebounded, giving up some of the week’s earlier losses.
Friday’s moves come after the Fed released minutes from its March meeting on Wednesday, which revealed that policymakers plan to reduce their bond holdings by a consensus amount of about $95 billion. The central bank is also considering interest rate hikes of 50 basis points in future meetings.
“Their main tool is the Fed’s funds rate, so that’s mostly it, but on top of that they’re going to start taking liquidity out of the system,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “They’re going to reduce their purchases of treasury securities and mortgage-backed securities by a trillion per year. That’s a lot of liquidity that’s taken out of the system and private investors are going to have to fill the gap.”
Earlier in the week, strong comments by Fed Governor Lael Brainard indicated the central bank could start reducing its balance sheet at a “rapid pace” as soon as May.
The pivot by the Fed has caused rates to shoot higher, with the 10-year Treasury yield hitting a new three-year high Friday, rising above 2.7%. The rate ended last week at 2.38% and started the year at 1.63%.
“The unusually fast hiking cycle indicates that in retrospect, the Fed’s (and most economists’)
‘transitory inflation’ narrative was too sanguine and the Fed now has to aggressively catch up
after falling behind the curve,” wrote Maneesh Deshpande, head of U.S. equity strategy at Barclays. “We remain cautious and believe upside is limited.”
Oil prices, which have been volatile during the Russia-Ukraine war, rose slightly on Friday. U.S. West Texas Intermediate (WTI) crude added 0.2% to $96.22 per barrel, while Brent crude gained 0.1% and topped $100 per barrel. Energy companies including Exxon Mobil and Halliburton moved higher.
Despite a mild rebound Thursday, the major averages were headed for weekly declines. The S&P 500 and Nasdaq were down 1% and 2.6%, respectively, through Thursday’s close. The Dow was down 0.7% week to date. The S&P 500 and the Nasdaq are on track for their first weekly losses in four weeks. Meanwhile, the Dow is headed for back-to-back weekly declines.
Investors are also looking ahead to earnings season, which will kick off next week with reports from five big banks. JPMorgan will report before the bell on Wednesday. Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo will report before markets open on Thursday.
“We’re in a trading range market and it’s going to be this way for some time,” Stephanie Link, chief investment strategist and portfolio manager at Hightower, told CNBC’s “Closing Bell” on Thursday. “And it’s really because we just have so many unknowns to deal with.”
