The stock market is getting hit hard on Tuesday. While there’s no one reason to point to for the market’s declines, there are enough concerns brewing to spur a selloff.
Why are stocks down? Here are four possible reasons.
The future of Fed Chair Jerome Powell. Is Federal Reserve Chairman Jerome Powell going to get nominated for another term? That might seem like a ridiculous question, but apparently, it’s not a given. When asked if Powell will be nominated for a second term, Jared Bernstein, a member of President Biden’s Council of Economic Advisers, said “It’s neither yes or no,” according to Bloomberg.
Inflation is coming—and the Fed might have to move. Higher inflation is a top concern for investors and signs of it are emerging, making them nervous about a Federal Reserve interest rate hike coming sooner rather than later. Manufacturing data out Monday revealed that companies saw the fastest rise in input costs since 2008—and that they are passing the higher costs along to customers. Supply constraints are preventing companies from meeting demand, sending prices upward. If consumer inflation is strong enough, the Fed would raise rates ahead of its current schedule. “Best we can tell supply concerns are a major issue for investors and inflation/inflation expectations are becoming a headwind,” writes Dennis DeBusschere, head of portfolio strategy research at Evercore. He adds that investors are expecting rate hikes sooner than the Fed is currently projecting. Concern about Powell would only add to the uncertainty.
Stocks are expensive. The average stock on the S&P 500 entered the day trading at just under 22 times earnings per share projections for the next 12 months. With inflation brewing, a dynamic that reduces the value of future cash flows, many strategists believe that valuations could fall from here. Morgan Stanley strategists, for example, see the S&P 500 trading at 20.2 times earnings by the end of the year. High valuations make stocks particularly vulnerable to bad news.
Tech is getting crushed. The technology sector is among the market’s most expensive, and it is seeing outsize losses on Tuesday—the Technology Select Sector SPDR ETF (XLK) is off 2.6%. Tech is also the largest weight in the S&P 500, so when it’s down, it weighs heavily on the index. The Nasdaq, seeing the worst losses of the three major U.S. indices, is weighted even more to tech, with several having market caps above $1 trillion.
(AMZN) fell 3.4%, 1.7% and 2.1%, respectively.
So which is it? “Still not certain of the catalyst in equity weakness,” writes NatAlliance Securities’ Andrew Brenner. “Could be the talk about Powell being replaced, which is way too early, or just the bullish consensus of equities being over their skis”
Or it could be all the above.
Write to Jacob Sonenshine at firstname.lastname@example.org