MW Dow books worst week since October on 'quad witching' Friday, as investors pivot with more hawkish Fed
By Christine Idzelis and Mark DeCambre
S&P 500 financial sector down 6.2% for week
U.S. stocks ended sharply lower Friday, with the Dow booking its worst week since October 2020, after comments from a Fed official exacerbated market volatility that followed the central bank's updated outlook this week for inflation and the economic recovery from COVID.
Friday also marked quadruple witching day, which is the simultaneous expiration of single-stock options, single-stock futures, stock-index options and stock-index futures.
The U.S. government was closed on Friday after President Joseph Biden signed a bill Thursday making Juneteenth a national holiday commemorating the end of slavery in the U.S. Stock and bond markets remained open for business.
How did stock benchmarks trade?
On Thursday , the Dow closed down 210.22 points, or 0.6%, at 33,823.45, marking a four-day skid that was its longest since January. The S&P 500 edged down 1.84 points, or less than 0.1%, to 4,221.86. The Nasdaq Composite gained 121.67 points, or 0.9%, to 14,161.35.
Weekly statistics
For the week, the Dow declined 3.5%, its second weekly fall in a row and its steepest such drop since the week of Oct. 30, 2020. The Nasdaq saw a weekly loss of 0.3%, snapping its four-week winning streak. The S&P 500 shed 1.9% for the week, ending a three-week win streak.
What drove the market?
Blame it on quadruple witching or James Bullard as the market took a leg lower, rounding out a downbeat week where investors looked for guidance from interest rate setters at the Federal Reserve.
Just as investors were girding themselves for a Fed with perhaps less of an inclination to champion easy-money policies, St. Louis Federal Reserve President Bullard offered a fresh dose of hawkishness, saying Friday that he thinks the Fed should lift its benchmark interest rate as early as late 2022.
In an interview on CNBC, Bullard said it was "natural" for the Fed to tilt hawkish at its meeting earlier this week, given recent strong inflation readings, but he also pointed to an economy that he views as recovering strongly from the pandemic.
Bullard also said he was "leaning" toward supporting an end to the purchases of mortgage backed securities, given the "booming housing market" and with concerns mounting around a potential bubble in the sector. "I would be a little concerned about feeding into the housing froth that seems to be developing," Bullard said.
Bullard's comments followed statements earlier in the week from the Federal Open Market Committee and remarks by Fed Chairman Jerome Powell, which were viewed as setting the stage for a less accommodative stance by the central bank. Fed policy makers penciled in two rate increases by the end of 2023 and discussed the eventual tapering of the central bank's asset buying program.
Growing expectations that the U.S. central bank will raise interest rates in 2023 has helped to pull equities down from record highs touched earlier this week by the S&P 500 and the Nasdaq Composite.
The Nasdaq Composite performed relatively better, however, as a fall in longer term Treasury yields this week encouraged buying in technology and growth stocks whose valuations are sensitive to bond yields.
Moves in longer-dated bonds have been pegged to some position unwinding as short-term yields rose and long-term yields fell, but some analysts wager that yields will eventually climb in response to a Fed that appears to be preparing the market for higher inflation and higher interest rates.
The flattening of the U.S. Treasury yield curve also contributed to a sharp fall in bank stocks this week, with the S&P500 financial sector down 6.2%.
The day's losses were led by declines in financials XLF (#phrase-company?ref=COMPANY%7CXLF;onlineSignificance=prominent), down 2.4%, consumer staples XLP (#phrase-company?ref=COMPANY%7CXLP;onlineSignificance=prominent) off 1.8%, energy XLE (#phrase-company?ref=COMPANY%7CXLE;onlineSignificance=prominent) slid 3% and communication services XLC (#phrase-company?ref=COMPANY%7CXLC;onlineSignificance=prominent) fell 1.2%.
A correction in the cyclical stock rally is underway as China's economy slows, U.S. fiscal stimulus fades, and the Fed becomes more hawkish, according to a BofA Global Research report dated June 17. That creates "a perfect summer storm for necessary correction in cyclicals, bulls rotating to tech," BofA's investment strategists wrote.
"We're definitely seeing people go back into growth," said Matthew Tuttle, chief executive officer and chief investment officer of Tuttle Capital Management, in a phone interview Friday. "I don't think that's the long-term play. I still believe in the reopening trade."
Matt Peron, director of research at Janus Henderson, told MarketWatch Friday that he thinks the reflation trade still has "gas in the tank," even if it pauses over the summer. The recent rotation into growth stocks may be a belief among some investors that peak inflation has passed, as well as the stock market's reaction this week to a still highly-accommodative Fed moving closer toward tightening its monetary policy. "It's tightening a tempest in a teapot," said Peron.
Thomas Mathews, market economist at Capital Economics, is forecasting the S&P 500 index will pare its gains over the coming six months and sees muted returns in the 2022 and 2023, amid a higher interest-rate regime. "This would represent an annualized increase of 4% from its current level, compared with 13% in the past decade," he forecast in a research note Friday.
There was no U.S. economic data Friday as the government observed the Juneteenth holiday.
-Christine Idzelis; 415-439-6400; AskNewswires@dowjones.com
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June 19, 2021 12:07 ET (16:07 GMT)
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