U.S. stock slipped 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 was flat, while the S&P 500 dipped 0.3% and Nasdaq Composite fell 0.8%.
Shares of transport stocks UPS and Union Pacific dipped about 1% on the back of a downgrade from Bank of America, which cited concerns about weakening demand and declining prices in the industry.
The losses have been driven by a change of tone by the Federal Reserve, signaling it will be even more aggressive to fight inflation. On Wednesday, the central bank disclosed its March meeting minutes, revealing that policymakers plan to reduce their bond holdings by a consensus amount of about $95 billion a month. The minutes also indicated potential interest rate hikes of 50 basis points in future meetings. A basis point equals 0.01%.
This followed strong comments by Fed Governor Lael Brainard earlier in the week who said 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. The 10-year Treasury yield hit 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.”
Despite a mild rebound Thursday and Friday’s early gains, the major averages were headed for weekly declines. The S&P 500 and Nasdaq were down 1% and 2.6%, respectively, for the week through Thursday’s close. The Dow was down 0.7% week to date. Those losses would mark the first weekly losses for the S&P 500 and Nasdaq in four weeks. Meanwhile, the Dow is headed for back-to-back weekly declines.
Tech shares have led the losses this week as investors dump the riskier shares in anticipation of higher interest rates crimping the group’s future profit growth. Nvidia and Tesla are in the red for the week, while healthcare and consumer staples have benefitted amid fears of a slowing economy.
The Dow bounced back on Thursday after two straight days of losses, ending the day up 0.25% after dropping as much as 300 points earlier in the session. The S&P 500 and Nasdaq also closed higher for the day.
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.”
