Stocks hit session lows, with the Dow losing 700 points as Powell’s warnings rattle Wall Street

During afternoon trading, information technology, consumer discretionary and communication services were the biggest laggards in the S&P 500. The sectors were down 3.4%, 3.3% and 3.3%, respectively, as investors fretted over the likelihood of higher interest rates.

Meanwhile, energy and utilities were the best-performing sectors in the broader market index. The sectors were down 0.6% and 1.1% each.

— Sarah Min

Federal Reserve Chairman Jerome Powell’s Friday speech was more hawkish than anticipated, weighing on stocks, according to Chris Senyek of Wolfe Research.

“A more hawkish tone was largely expected coming into his speech this morning,” Senyek wrote in a Friday note. That said, the market is interpreting his tone as even more hawkish than those expectations.

After Powell’s remarks, both yields on the U.S. two-year treasury and the March 2023 fed funds future were up by roughly 0.5%, and stock slumped. Going forward, it’s likely that stocks will continue to trade down according to Senyek.

“This speech is likely to keep downward pressure on equity markets, with the “Growth” trade and “long-duration” subsectors & stocks getting hit hardest… think a reversal of the trade since mid-June,” he wrote.

Senyek also reiterated his bearish stance on stocks. Going forward, he sees inflation readings and other economic data as the largest market drivers through the end of the year.

“We continue to believe that (1) core inflation is going to be a thorn in the Fed’s side and prove to be very persistent, and (2) headwinds from Fed tightening have only just started to show up in economic readings and a demand-driven recession is going to hit at the end of this year or beginning of next year,” he said.

—Carmen Reinicke

Roughly six stocks at the New York Stock Exchange fell for every advancer Friday, as the market sold off following Fed Chair Jerome Powell’s highly anticipated speech. At the S&P 500 level just 15 names traded higher.

—Fred Imbert

With a 1% excise tax on share buybacks set to take effect next year, companies may speed up buybacks or start returning more money to investors through dividends.

While the 1% levy shouldn’t have a big impact on companies, taxes often influence corporate payout decisions, UBS analyst Keith Parker wrote in a note Wednesday.

According to an estimate by the Tax Policy Center, the tax could boost corporate dividend payouts by 1.5%.

To be sure, there are several things companies have to take into consideration when deciding whether to move up buybacks or push out a dividend, including the tax treatment that shareholders will face.

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—Michelle Fox, Darla Mercado

Markets have priced in a recession and are steering toward a soft landing, according to Fundstrat’s Tom Lee.

“I think we’ve seen a lot of evidence this is turning out to be a soft landing,” Lee said Friday on CNBC’s “Halftime Report.”

The investor pointed to softness in durable goods, such as falling used car prices this year, as disinflationary categories that are benefiting consumers. “That’s not a recession, that’s an adjustment of demand,” Lee said.

“I think that there are again, like you said, a lot of mixed currents, but the markets priced in a recession. I think a soft landing to me still seems more probable,” he said.

— Sarah Min

The communications services sector, which includes Big Tech stocks, drove the market sell-off that ensued following Federal Reserve Chair Jerome Powell’s speech.

The S&P 500’s communications services sector slumped by 2.5% around 10:42 a.m. ET. Tech giants in the group helmed the decline, with shares of Alphabet sliding nearly 4%. Meta lost 2.5% and Netflix fell 2%. Twitter lost 1.5%.

Tech names are especially sensitive to rising interest rates, which hurt the value of the stocks’ future earnings.

Indeed, Powell gave a brief hawkish speech at the Fed’s annual economic symposium at Jackson Hole earlier this morning. He signaled that policymakers would adopt a restrictive stance “for some time,” and he warned against loosening policy too soon.

–Darla Mercado

“He hit the right notes,” said Wells Fargo’s Michael Schumacher, noting that the chairman’s speech has to be the shortest ever from a chairman at Jackson Hole.

“Eight minutes. The market has been sitting there doing nothing all week, just for eight minutes,” he said.

— Sarah Min, Patti Domm

A better-than-expected reading for the University of Michigan consumer sentiment index may be helping to offset Jerome Powell’s hawkish speech at Jackson Hole.

The final reading for the August consumer sentiment index came in at 58.2. That was up from 51.5 in July and above the 55.3 expected by economists, according to Dow Jones.

Year-ahead inflation expectations fell to 4.8% from 5.2% in July. That marks the lowest reading in eight months.

— Jesse Pound

Fed Chairman Jerome Powell reiterated that the central bank will continue raising rates to subdue inflationary pressures. He also warned, however, there may be “some pain” ahead as these measures take hold.

 “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Powell said in a speech at a Jackson Hole, Wyoming symposium.

—Fred Imbert, Jeff Cox

Treasury yields were mixed, ahead of Federal Reserve Chairman Jerome Powell’s Jackson Hole speech at 10 a.m. ET.

The 10-year yield was higher at 3.05%. The 2-year yield, which is most driven by Fed policy, was slightly lower at 2.38%. Yields move opposite price. Trading was light.

“It’s sleeping, just waiting for the big event,” said Wells Fargo’s Michael Schumacher. “There’s no motivation right now. You could be dead wrong by a lot. Most people think it will be a non-event, but why take the risk.”

The chairman is expected to emphasize that the Fed will be relentless in using its policies to drive down inflation, though the futures market has been pricing in a quarter point rate cut for the second half of next year. He is also expected to stress that once the Fed raises interest rates to its terminal rate, or end rate, it will likely hold them there.

The fed funds futures market is pricing in some significant hikes, including the 64 basis points of a hike in September, notes Schumacher. That pricing reflects the current market debate on whether the Fed will raise rates by another three-quarters points or slows to a half point hike at its Sept. 20 and 21 meeting.

“Right now, the market is pricing 3.62% for the end of this year, and the peak to be about 3.78% in March,” said Schumacher. The Fed has currently targeted the fed funds rate in a range of 2.25% to 2.50%.

— Patti Domm

As stocks climbed off their mid-June lows, the market value of cryptocurrencies rose almost 40%, thanks largely to the 72% jump in ether. That momentum has cooled off now, however, as investors have been reassessing the sustainability of the relief rally in risk assets broadly and wait to see what Fed Chairman Powell says in Jackson Hole.

“Our view is that risks related to a mild recession are likely discounted,” the firm said in a note Friday. “But the potential for a hard recession (our macro colleagues expect S&P EPS to fall in 2023 and question the excitement around 8.5% inflation) may result in another risk asset correction including crypto/digital assets.”

— Tanaya Macheel

The S&P 500 opened little changed ahead of Federal Reserve Jerome Powell’s Jackson Hole speech.

The broader market index dipped 0.03%, and the Nasdaq Composite slid 0.08%, shortly after the bell. The Dow Jones Industrial Average advanced 70 points, or 0.21%.

— Sarah Min

Personal consumption expenditures, one of the Federal Reserve’s favorite inflation indicators, slipped on a monthly basis in July and was up less on the year than anticipated.

The inflation measure fell 0.1% in July and was up 6.3% on the year, the Bureau of Economic Analysis reported Friday. It was expected that the PCE index would be unchanged on a monthly basis in July and up 6.4% on the year.

The report also showed that personal income ticked up less than expected, up 0.2% month over month versus an estimated 0.6%. It’s one of the reports the Fed will be watching ahead of its September meeting, when it is likely to raise interest rates again.

—Carmen Reinicke

Markets are getting “ahead of themselves” pricing in a soft landing, according to UBS.

“Recent US economic data has been encouraging, improving the likelihood of the Fed achieving a soft landing. But we think markets may have gotten ahead of themselves in pricing in this scenario,” UBS’ Global Wealth Management Chief Investment Officer Mark Haefele wrote in a Friday note.

Investors should prepare for a volatile period ahead as markets get more information on whether the Federal Reserve can or can’t engineer a soft landing. In its base case, UBS believes that stocks will reach June 2023 at a similar level to current prices, according to the note.

“If the Fed’s incremental rate hikes are…