Four More Years

By Alex Eule |  Monday, November 22 Status Quo. There was really just one story for markets today, though it came with subplots and a surprise ending. After months of waiting, President Joe Biden made his choice for chair of the Federal Reserve. In the end, the status quo won out, with Jerome Powell getting the nod for a second four-year term.  The S&P 500 jumped on the news, which came shortly before markets opened this morning. An hour into trading the large-cap index was up about 1%, before investors started to reconsider. Stocks fell into the close, with the S&P ending the day down 0.3%. The initial reaction stemmed from investors' long-standing preference for Powell over his more progressive rival, Lael Brainard. As a consolation prize, Brainard got the vice chair spot, which could set up an interesting set of policy meetings over the coming years.  The status quo was a reason to celebrate, at least at first. By the end of the day, though, a different reality seemed to have set in. Powell's renomination means the Fed chair has a clear path to unwind the Fed's balance sheet -- the so-called taper -- followed by a now-inevitable increase in interest rates.  The futures market is now pricing in a 77% chance of at least one rate hike by the Fed's June 2022 meeting, up from 67% on Friday. Investors now see as much as a 22% chance of four rate increases in 2022, a possibility that was given odds of just 13% one month ago.  Sure enough, Treasury yields spent the day heading higher. The yield on the 10-year note rose nine basis points, to 1.625%, snapping a three-day decline. The prospect of higher rates weighed on growth stocks. The tech-heavy Nasdaq Composite finished the day down 1.3%.  My colleague Eric Savitz notes that much of the pain came from the particularly high-growth cloud sector. Cloud collaboration software firm Asana tumbled 23% on the day. Cloud warehousing stock Snowflake fell 9%, while cloud-based work-from-home enablers like Okta and Docusign each fell about 6%. Here's how Eric described the selloff:  Higher rates tend to trigger selling in high-growth tech shares: The higher rates go, the less investors value future growth in today’s dollars. It isn’t a judgment on how the Fed views tech stocks. It’s all about the math. The math could be in flux for several months now as investors actually embrace the reality of rising rates. With the Fed's leadership clear, there are no more excuses.

 

DJIA: +0.05% to 35,619.25 S&P 500: -0.32% to 4,682.94 Nasdaq: -1.26% to 15,854.76 The Hot Stock: Moderna +7.2% The Biggest Loser: Under Armour -5.9% Best Sector: Energy +1.8% Worst Sector: Communication Services -1.2%