Markets Drop Sharply After Fed Comments and Rate Hike

In a fairly volatile week of trading, the Dow (-1.4%), NASDAQ (-5.6%), and S&P 500 (-3.3%) finished the week with solid losses, despite a sharp rally on Friday.  Meanwhile taxable bonds fell almost 1%, but tax-free municipal bonds rose about 0.3%.

The Fed raised interest rates last week by an expected 0.75%, but instead of the actual rate hike, investors were focused on the Fed’s remarks following the announcement.  The stock market dropped sharply after the Fed Chairman’s comments because investors were hoping that the Fed would give signs of pausing rate hikes, but no such comments were made.  The Fed noted that the pace could slow, but he stated, “Let me say this, it is very premature to be thinking of pausing”.  Investors were not happy with those remarks, so the markets dropped sharply on Wednesday and Thursday.

Inflation and the Fed rate hikes have been the drivers of the markets for nearly the past year.  The all-important Consumer Price Index (CPI) for October will be released on Thursday, and the midterm elections are on Tuesday.  Based on polls, it appears that the Republicans are favored to win one or both of the houses of Congress, and markets generally respond favorably to a dividend government.  Plus, the markets also don’t like uncertainty, so a rally can be expected once the elections are over.

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