Federal Reserve Chairman Powell’s 8-minute speech at the Jackson Hole Central Bank Annual Meeting caused the U.S. stock market to stage a "long-awaited" plunge.
The three major U.S. stock indexes collectively fell by more than 3%. The Dow Jones Industrial Average fell more than 1,000 points in one day for the first time in three months. The S&P and the Nasdaq Index both suffered their largest daily declines in more than two months, with the latter falling nearly 4%.
Powell warned against easing monetary policy too early. He also said that the decision to raise interest rates in September will depend on data, and believed that high interest rates that are restrictive to economic growth may be maintained for a period of time.
Powell's "Eagle Call" dealt a heavy blow to the growth stocks that had surged since July, and put the valuation of U.S. stocks that had returned to above the mean in an awkward position.
The market is "over-priced" in U.S. stocks amid expectations of easing
html After the Federal Reserve aggressively raised interest rates by 75 basis points in July, recession concerns intensified and expectations of high inflation "peaking" made the market begin to bet that the Fed was about to "turn", and easing expectations were therefore rapid. It heated up and "over-priced" U.S. stocks, with growth stocks rebounding sharply.According to data from Goldman Sachs, in the second quarter of this year, growth fund bought stocks at a price-to-sales ratio of at least 20 times, including Nvidia, cloud computing and data analysis software company Snowflake, advertising technology company Trade Desk, etc. Nvidia and Trade Desk trade at high price-to-earnings ratios of 42.7 times and 57.9 times.
However, judging from the hawkish stance of the Federal Reserve, the above-mentioned easing expectations were somewhat premature and overdrafted, so they were "smashed" by Powell at this meeting. As Ed Yardeni, chief investment strategist at Yardeni Research, wrote:
Powell extinguished market expectations that the Fed will pause tightening and cut interest rates next year.
The result of this is that the market needs to correct its excessive loose expectations in the early stage, and US stocks, especially high-valued growth stocks, took the lead in falling.
In contrast, the U.S. bond market has already priced in hawkish expectations, so U.S. bond yields have risen before this meeting. But before Friday, the decline in U.S. stocks was still limited, so there was a more violent reaction to the outcome of the meeting.
U.S. stocks may go through a difficult journey before the next meeting
What really arouses market concern now is not the scale of interest rate hikes that the Federal Reserve will raise at the next meeting, but when the Fed will stop raising interest rates and the level of interest rates. How long will it last.
In this regard, Thomas Mathews, market economist at Capital Economics, wrote:
(We) believe that the central bank is not ready to 'pivot'... We suspect that this means that the central bank is still not ready for some time to come. will be a headwind for the market.
This also means that at least until the resolution of the next Federal Reserve meeting on September 2 is truly "implemented", U.S. stocks, especially growth stocks, may go through a difficult journey.
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