Tuesday’s market rally was brief. Stocks opened higher but quickly gave up their gains. A more than 5% drop in oil prices, while welcome news to consumers, led to a big sell-off in energy stocks.
The Dow was down nearly 310 points, or 1%. Shares of Chevron (CVX), a component of Dow Jones, fell more than 2%. The S&P 500 fell 1.1% and oil stocks were the biggest losers. S&P Energy Select Sector (XLE)’s SPDR fund is down 3.4%.
The bad mood on Wall Street wasn’t just about oil, as the entire market was reeling on Tuesday. The Nasdaq, home to many big tech stocks, was also down 1.1%.
Stocks suffered losses for the third day in a row. Investors are still dealing with the fallout from Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole on Friday, which led to a drop of more than 1,000 points in the Dow Jones Index.
The market had been expecting – and some might say hopeful – that Powell would suggest that the Fed had become less concerned about inflation, which would have been a possible sign that the central bank would not raise interest rates too aggressively at its September 21 meeting.
But Powell spoke instead about how continued rate hikes are still necessary to fight inflation, even if it means “some pain” for consumers and businesses. As such, traders now expect another three-quarters of a rate hike next month.
It is worth noting that market volatility occurs during a period of calm known on Wall Street. Trading volume is light as many investors are enjoying the last part of their summer vacation.
Furthermore, there is not a lot of economic data or earnings data to move the stock at the moment.
The numbers released on Tuesday weren’t too bad. Retailer Best Buy (BBY) reported better-than-expected earnings and sales. US companies still have more jobs and consumer confidence actually rose in August.
“Lower gas prices, higher stock prices and finally the ability to take time off improved the mood of consumers in August,” Jimmy Cox, managing partner at Harris Financial Group, said in a report.
But good news can sometimes be seen as bad news on Wall Street. Any signs that the economy may hold up better than expected and not head into a major deflation will likely be interpreted as inflation – meaning that further big interest rate hikes may be imminent.
“Usually, seeing companies that want to hire more workers is a good thing. However, after Fed Chairman Powell’s short Jackson Hole speech focused briefly on reducing demand and jobs, more jobs is an additional reason for the Fed to raise interest rates,” Brice Dottie, portfolio manager at Sit Fixed Income Advisors, said in an email.
With all that in mind, investors will be paying close attention to Friday’s jobs report. Economists expect 300,000 jobs to be added in August. Although that would be a slowdown from the 528,000 added in July, it’s still a healthy payroll for the nation – and wouldn’t be considered a harbinger of a recession.