Market Insights

Stocks keep diving as the Federal Reserve menaces investors with aggressive interest-rate hikes.

The S&P 500 fell 3.3 percent between Friday, August 26, and Friday, September 2. It was the third straight negative week, with over 90 percent of the index’s members losing value. Every major sector also declined.

“We’re going to have restrictive policy for some time,” New York Fed President John Williams told The Wall Street Journal last Tuesday. Loretta Mester of Cleveland supported hiking at least 150 points by early 2023 and not lowering them all year. The comments added to a bearish spiral the previous week after Chairman Jerome Powell spoke of using “tools forcefully” to crush inflation with “a sustained period of below-trend growth.”

That aggressive stance by voting members of the central bank has hammered sentiment. Less than 22 percent of investors expect the market to be higher in six months, while 50 percent see lower prices, according to the American Association of Individual Investors. Sentiment hasn’t been so negative since early July.

Wall of Worry?

While that may sound ominous, the AAII survey is often considered a contrary indicator. Bearish readings suggest investors are done selling and may be sitting on ample cash, which in turn can support prices. This is why the old adage says, “bull markets climb a wall of worry.”

Last week also had positive news on the economic and inflation fronts. First were the signs of inflation continuing to ease. The Institute for Supply Management’s manufacturing index showed prices falling for the second straight month in August. The Labor Department’s non-farm payrolls report also saw wages rising less than expected.

Other numbers reflected general strength: Initial jobless claims fell more than expected to a two-month low. July job openings exceeded forecasts by 900,000 and consumer confidence shot past expectations.

Charting the Market

Last week’s pullback landed the S&P 500 back around 3,920. That level is potentially important because it’s roughly where where the index peaked on July 8 and bounced on July 26. If it holds as support, it could become another higher low. That could be important because it would follow a higher high in mid-August. Continued higher lows and higher highs could make some chart watchers see an end to the bearish trend.

Investors may also monitor whether the index returns above its 50-day moving average. (See chart above.) Remaining below the moving average could be viewed as a bearish signal, while a move above could suggest bullish momentum is taking hold.

The Week Ahead

This holiday-shortened week is relatively quiet because of Labor Day, although there are still some noteworthy events.

Today brings the Institute for Supply Management’s service-sector index. Ethereum will also activate its Bellatrix upgrade, the final step before the cryptocurrency’s key switch to proof-of-stake sometime between September 10 and 20.

Wednesday features central bank speakers like Mester and Lael Brainard. Apple (AAPL) will also hold a product event at 1 p.m. ET that’s expected to include new iPhones.

The European Central Bank announces interest-rate changes on Thursday morning. It could be unusually important because of Europe’s inflation crisis and risk of recession. Initial jobless claims and crude-oil inventories are also due.

Kroger (KR) reports earnings Friday morning.