The stock market is supposed to be forward-looking. This past week it was rocked by the minutes of a meeting that ended more than three weeks ago.
The Federal Reserve released the minutes of its December meeting this past Wednesday, and what was inside them apparently took the market by surprise. Observers pointed to the fact that the Fed discussed winding down its balance sheet—something Chairman Jerome Powell failed to mention at his press conference last month—and its perception of the job market, which appears to be close to full employment.
It was more a change in tone than any one thing the Fed said that was most likely responsible for the market’s reaction, says Chris Harvey, U.S. equity strategist at Wells Fargo Securities. Before the minutes, the market might have thought of the Fed as being reluctant to tighten. After, it knew that wasn’t the case, as odds of a March rate hike jumped from just over 50% before the minutes’ release to more than 75% on Friday.
“Two months ago, the market believed they were going to have to push the Fed,” Harvey says. “Now that’s not the case.”
For a market that is both expensive and crowded, that wasn’t good news, as the priciest, most speculative stocks—which had already been beaten up, mind you—were hit hard again. As of Thursday, 38% of Nasdaq stocks had fallen 50% or more from their 52-week highs. That the benchmark is down only 5.7% from its all-time high is thanks to Big Tech stalwarts like Apple (AAPL) and Microsoft (MSFT), which have become so large that they mask the weakness underneath.
“Whatever the fundamental and macro considerations, there is no doubt that investors have been selling first and trying to figure out the rest later,” writes Sundial Capital Research’s Jason Goepfert.
Even the meme stocks found fighting the Fed difficult, if not impossible. GameStop (GME), for instance, surged nearly 30% in aftermarket trading this past Thursday on reports that it had created a division dedicated to cryptocurrency partnerships and was in the process of building a marketplace for non-fungible tokens. By the end of trading Friday, GameStop stock was up just 7.3%, and it finished the week off 5.2%.
Don’t look for weak economic reports to be “good” news. Friday’s payrolls report revealed that just 199,000 jobs had been created in December, less than half economists’ forecasts. But that didn’t stop the 10-year Treasury yield from rising 0.036 of a percentage point to 1.769% on Friday, its highest level since January 2020 based on a 3 p.m. close. That means that it will likely take a big miss on Wednesday’s consumer-price-index reading, which is expected to show an increase of 7.1% year over year, to shift the Fed’s course, and maybe not even then.
For now, it means that holding expensive and volatile stocks probably isn’t worth the reward, Wells Fargo’s Harvey says. “We need a repricing of risk,” he says. “And that’s exactly what’s going on.”
Not even GameStop can fight the Fed.
Write to Ben Levisohn at Ben.Levisohn@barrons.com