Stock indexes are coming off another week of losses as investor anxiety continues to build over aggressive Federal Reserve policy tightening, red hot inflation, slowdowns in both corporate earnings and economic growth, increasing fallout from China’s extreme Covid lockdowns, and Russia’s unrelenting invasion of Ukraine.

The Dow on Friday experienced its worst one-day loss since October 2020, ending down nearly -1,000 points and bringing its year-to-date decline to -7%. The S&P 500 is now down -10.4% for the year while the Nasdaq has lost nearly -18%. The top investor concerns have not really changed, in fact, the uncertainty and pessimism surrounding most of them seems to just keep growing.

Federal Reserve

Recent comments from Federal Reserve officials are reinforcing ideas that the central bank may be positioning to front-load its rate hikes in order to “shock” the economy out of its current inflationary trajectory. Wall Street has widely been pricing in a +50 basis point hike from the Fed at its upcoming May 3-4 meeting and bets are rising that the move will be repeated at the following three or four meetings. A few on Wall Street are even starting to increase their odds for an eventual +75 basis point hike.

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There are also growing concerns about the pace and timing of the Fed’s balance sheet reduction plans. Many bulls worry that aggressive unwinding of the Fed’s nearly $9 trillion in assets in conjunction with rapidly increasing borrowing rates will put a stranglehold on growth by severely curtailing money flow.

These fears come on top of concerns about the decline in earnings growth that is already apparent. Bears believe earnings and profit expectations need to be revised sharply lower due to ongoing – and possibly intensifying – headwinds from supply chain dislocations and rising costs for materials and labor.

Bears also believe prolonged inflation will begin to limit companies’ ability to offset climbing costs with higher prices as consumer budgets get increasingly tighten. Lets also keep in mind 10-year Treasury yields remain above 2-year yields, and this somewhat gives the Fed a green light to remain hawkish without triggering a yield spread inversion.

We also have the corporate headwind associated with a much stronger US dollar which is putting pressure on foreign central banks like ECB and BOJ to accelerate their own monetary policy tightening, increasing the risk of recession in many parts of the world. Meaning even greater pressure on the growth of the global economy.

Energy sector and Russia

As you can see, crude oil prices have backpedaled as of late as the market continues to hear more talk and debate regarding a larger global slowdown.

Remember, China is the worlds largest importer of crude oil. The problem is many sources are estimating fuel consumption inside China during the month of April will drop -20% from year-ago. In fact, areas in eastern China will see a -40% reduction in demand, mainly due to the covid lockdown in and around Shanghai.

As for the war in Ukraine, reports circulated over the weekend that Putin has given up on any type of peace agreement nearby and is looking to take more ground in and around the Black Sea including the major exporting area of Odessa and incremental territory in its quest to build a Russian controlled land bridge to Crimea.

There’s also talk that Putin may have plans to try to gain control of Moldova’s Transnistria region, an unrecognized breakaway state. Moldova is not a NATO member but an expansion of Russia’s aggressions into yet another country is obviously very alarming to the West. In the USA, about a third of S&P 500 companies and nearly half the Dow companies release their Q1 earnings this week, including tech giants Alphabet and Microsoft on Tuesday, followed by Facebook and PayPal on Wednesday, and Amazon, Apple, and Twitter on Thursday.

Looking ahead, investors are anxious to see the first estimate for Q1 Gross Domestic Product (GDP) scheduled for release on Thursday as well as the PCE Prices index on Friday. After hitting an annual rate of +6.4% in February, the PCE Prices Index is expected to climb even higher this month thanks to higher energy prices.

Bottom line, there are very few signs that overall inflation will be easing any time soon and that the Fed may have to become even more hawkish for a longer period of time. As long as the trade thinks that inflation can stay hot for an extended period of time and that the Fed may have to keep raising rates it’s going to be tough to sustain a rally.

Make It Or Break It – What Is Happening With Stock Market?

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