[New York Stock Market] Declines for 4 Consecutive Trading Days Amid Tightening Concerns... Over 4% Drop in One Month

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices on the U.S. New York stock market closed lower on August 31 (local time), the last trading day of August, as the Federal Reserve's (Fed) tightening to reduce inflation weighed heavily. It marked the fourth consecutive day of decline. The three major indices each fell more than 4% over the course of August.

On the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 31,510.43, down 280.44 points (0.88%) from the previous session. The large-cap S&P 500 index fell 31.16 points (0.78%) to 3,955.00, and the tech-heavy Nasdaq index dropped 66.93 points (0.56%) to 11,816.20.

However, the decline was limited to less than 1% as the drop was supported by a rebound buying sentiment following the sharp sell-off after Fed Chair Jerome Powell's Jackson Hole speech. Over the month of August, the Dow and S&P 500 indices fell 4.1% and 4.2%, respectively. The Nasdaq also dropped nearly 4.6%.

By sector, all sectors of the S&P 500 except energy and utilities closed lower, with weakness particularly notable in airline and cruise stocks. United Airlines and American Airlines closed down 2.59% and 2.55%, respectively. Delta Air Lines (-2.05%), Carnival (-3.17%), and Royal Caribbean (-2.13%) also declined together. Vaccine stocks were also sluggish. Pfizer and Moderna, whose new vaccines targeting the COVID-19 Omicron variant were approved, closed down 1.35% and 2.69%, respectively.

Bed Bath & Beyond, a U.S. household goods retailer that had attracted attention as a Wall Street 'meme stock,' plunged more than 21% despite announcing a restructuring plan that included securing new loans, laying off 20% of employees, and closing stores. HP fell more than 7%, recording the worst performance in the S&P 500 after warning of a lowered business outlook. On the other hand, social media company Snap, which announced a 20% staff reduction the previous day, rose 8.69%. Despite investment bank Barclays downgrading its rating, the trading app Robinhood closed up 0.84% on the day.

Investors continued to monitor Fed tightening prospects, officials' remarks, and movements in Treasury yields. The preliminary August Consumer Price Index (CPI) for the Eurozone showed a rise in the 9% range, maintaining an all-time high level, reflecting ongoing concerns about inflation and caution regarding tightening. Gonzalo Assis, an analyst at Bank of America (BoA), noted in an investor memo that Fed Chair Jerome Powell's hawkish speech at Jackson Hole last week shook the stock market significantly and that volatility may continue to increase.

Hawkish comments from Fed officials also continued. Loretta Mester, President of the Cleveland Federal Reserve Bank, said in a speech that "it is necessary to raise the federal funds rate to slightly above 4% by early next year." Currently at 2.25?2.50%, several additional rate hikes are needed to push the rate above 4%. She drew a line against market speculation about possible rate cuts next year, stating, "I do not expect the federal funds rate to be cut next year." She added, "As financial markets tighten further, volatility will persist and growth may slow more than expected," but emphasized, "It will be painful in the short term, but this (pain) is the same even if inflation remains high."

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in over a 70% chance of a 0.75 percentage point rate hike in September. This would mark the third consecutive giant step (0.75 percentage point increase).

The yield curve inversion between 2-year and 10-year Treasury yields continues in the New York bond market. Such an inversion is generally considered a precursor to a recession. Jeffrey Gundlach, CEO of DoubleLine Capital, warned investors to pay attention to this recession signal, calling it a "reliable indicator of economic difficulties." The 10-year yield rose intraday to 3.187%. The 2-year yield, which hit a roughly 15-year high of 3.497% the previous day, also edged up to 3.485%.

Economic indicators were mixed. The ADP National Employment Report showed that U.S. private sector employment increased by only 132,000 in August compared to the previous month, significantly below market expectations. On the other hand, the Chicago Purchasing Managers' Index (PMI) for August was 52.2, above the baseline of 50, and slightly improved from the previous month.

Market experts expressed mixed views on the possibility of further declines but warned as the traditionally worst month, September, approaches. Sam Stovall of CFRA predicted, "The S&P 500 may test the June lows, but those lows will hold." Analyst Assis expressed concern that "the market's reflection of tightening may not be fully complete yet." Vinky Chada, Deutsche Bank's Chief Global Strategist, appeared on CNBC forecasting a possible recession in September due to seasonality but a recovery in October.

The market is watching the employment report to be released on the 2nd and the CPI scheduled for the 13th of next month.

Oil prices fell on the day. On the New York Mercantile Exchange, October West Texas Intermediate (WTI) crude oil closed at $89.55 per barrel, down $2.09 (2.3%) from the previous session. This was the lowest closing price since the 17th of the month.