Stocks pull back pre-Fed

  • Inflation hot, interest rates up, stocks down
  • Crude oil holds above $120/barrel, gold pivots higher
  • This week: FOMC, retail sales, Producer Price Index

As the Federal Reserve gets ready to announce another inflation-fighting rate hike, the US stock market is coming off another down week amid—what else?—higher-than-expected inflation data.

After consolidating for most of the past two weeks, the S&P 500 (SPX) broke sharply to the downside last Thursday, and extended the retreat on Friday in the wake of the latest Consumer Price Index (CPI) report:

Chart 1: S&P 500 (SPX), 3/29/22–6/10/22. S&P 500 (SPX) price chart. Range breakdown.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

The headline: Two-day swoon results in market’s biggest weekly loss since January.

The fine print: On Thursday and Friday, the SPX did something it has done only 42 other times since 1960—fell 2% or more on back-to-back days. The last time was in March 2020.

The number: 8.6%, the CPI’s year-over-year May increase—more than analysts had expected, and the inflation gauge’s biggest jump since December 1981.

The move: After cooling off for much of May, the benchmark 10-year T-note ended last week at 3.16%, its highest close since November 12, 2018.

The scorecard: As it has during a few other sharp sell-offs in recent months, the small-cap Russell 2000 (RUT) fell less than the other major US indexes last week:

US stock index performance table for week ending 6/10/22. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Sector roundup: The strongest S&P 500 sectors last week were energy (-0.5%), consumer staples (-2.3%), and health care (-3.1%). The weakest sectors were financials (-6.6%), information technology (-6.1%), and consumer discretionary (-6%).

Stock movers: On Tuesday, Mirati Therapeutics (MRTX) +36% to $58.89 and Gitlab (GTLB) +28% to $51. On the downside, Forge Global (FRGE) -26% to $13.59 on Monday, Loyalty Ventures (LYLT) -45% to $6.02 on Wednesday.

Futures: WTI crude oil (CLN2) hit another contract high of $123.18/barrel on Wednesday, but pulled back Friday to end the week at $120.67. After trading sideways most of last week, August gold (GCQ2) fell to a three-week low of $1,826.50/ounce early Friday but rebounded to close near a one-month high of $1,875.50. Biggest up moves: June Russian ruble (R6M2) +9.3%, July corn (ZCN2) +6.4%. Biggest down moves: July lumber (LBSN2) -10.8%, July oats (ZON2) -5.7%.

Coming this week

Wednesday's Fed interest rate announcement highlights a busy week of numbers:

Today: Consumer Inflation Expectations
Tuesday: NFIB Small Business Optimism Index, Producer Price Index (PPI)
Wednesday: Retail Sales, Empire State Manufacturing Index, Import Price Index, NAHB Housing Market Index, Fed interest rate decision
Thursday: Housing Starts and Building Permits
Friday: Industrial Production and Capacity Utilization, Leading Indicators

Earnings this week include:

Today: Oracle (ORCL)
Tuesday: Ferguson (FERG), Core & Main (CNM)
Wednesday: John Wiley & Sons (WLY)
Thursday: Kroger (KR), Adobe (ADBE), Commercial Metals (CMC), Jabil (JBL)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Bear-market rallies and realities

Last week’s downturn may have disappointed investors who had hoped the rally off last month’s lows marked the beginning of the end of 2022’s correction. But as Morgan Stanley analysts recently noted, enthusiasm over bear-market rallies have to be weighed against the overhanging risk of decelerating S&P 500 earnings and the likelihood of further downside.1

As noted in “Lessons from corrections and bear markets,” whenever the SPX closed a week 15% or more below the highest weekly close preceding it (which it did on May 13), the index fell into a bear market 85% of the time. On May 20, the SPX hit bear territory on an intraday basis (trading more than 20% below its January record close), but it has yet to actually close below that threshold, even though it closed less than 1.7% above it on Friday.

Investors shouldn’t be too discouraged if that happens, though, since “Tracking the bear” pointed out that, over the past six decades, by the time the SPX officially entered bear territory, the selling was usually closer to its end than its beginning.

Just don’t expect the market to ring a bell when a bear-market rally is about to turn into something more.


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1 Will Earnings Growth Reaccelerate? 6/6/22.

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