Stocks fell on Friday, ending the week lower after the Federal Reserve signaled that interest rates will stay higher for longer.
Markets have turned wary in recent days as they assessed the impact on consumer and business demand from the Fed's message that it would keep borrowing costs high to quell inflation. The central bank's chair, Jerome Powell, also did little to bolster hopes the US economy would avoid recession.
In other economic news, S&P Global said its flash US Composite PMI index came in at 50.1 in September, slightly down from 50.2 in August, in a sign of stagnating business activity.
Elsewhere in central banks, the Bank of Japan held to its ultra-low interest rates on Friday and maintained its pledge to support the economy, suggesting no shift in its massive stimulus program is coming. The yen dropped against the dollar after the decision.
In individual stocks, shares in Activision Blizzard (ATVI) rose to close in on Microsoft's (MSFT) offer price, after the UK antitrust regulator said the door is open for the $69 billion acquisition to go ahead.
Also in focus were the strikes that have buffeted the auto sector and Hollywood. The UAW said it would ratchet up its strikes against GM (GM) and Stellantis (STLA). And despite a marathon session of negotiations, the big four studios — Warner Bros. Discovery (WBD), Disney (DIS), Netflix (NFLX), and NBCUniversal — failed to reach a deal with striking writers.
Wall Street posts losing week after hawkish Fed signals
Investors gave up more ground on Friday capping off a bruising week in which the Fed's hawkish stance on keeping rates higher for longer took a toll on the stock market. All three major indexes fell into the negative for the day and for the week.
A look at the week ahead
After the Federal Reserve's latest outlook on elevated rates dragged stocks lower this week, the days ahead will bring updates on the ongoing labor strikes, a fresh read on the Fed's preferred inflation gauge and earnings from Costco and Nike. Yahoo Finance's Brent Sanchez has a graphical breakdown of what to watch next week.
The Fed shifts from a soft landing to 'no landing'
Even as Wall Street recoiled after the Fed signaled that rates will stay elevated for longer, some experts are pointing to the Fed's longer term outlook to find a pathway that remains "remarkably benign."
The Fed's "dot plot," or visualization of policymakers' expectations for where interest rates could be headed in the future, was hawkish, said Michael Gapen, an economist at Bank of America, in a note on Friday. Central bankers are expecting one more rate hike before the end of the year. And future rate cuts are now forecasted to be smaller than previously thought. But even so, Gapen said, the economic costs of the prolonged tightening appear to be shrinking.
For instance, Fed officials believe that unemployment will drop lower than they previously thought at 3.8% this year, below the prior prediction of 4.1%. In addition, central bankers see stronger economic growth than they initially projected, boosting this year's figure to 2.1%, from June's 1% prediction. "This suggests that there is no price to be paid in terms of growth or jobs for monetary tightening and slower-than-expected rate cuts," Gapen said.
Higher for longer might not be as bad as some fear for stocks, strategist says
Stocks were crushed following Wednesday's message from the Federal Reserve that interest rates will remain higher for longer than investors initially thought.
The S&P 500 fell more than 2% in a two-day span and the yield on the benchmark 10-year Treasury hit its highest level in 15 years. In total for the week, data from Bank of America showed investors dumped equities at their highest pace since December 2022.
But that reaction might be overdone according to Fundstrat's head of research Tom Lee.
"The market had an overly hawkish reaction to the FOMC meeting," Lee said in a video for clients after the market close on Thursday.
Lee disagrees with one of the main factors driving the market action. The Federal Reserve's updated Summary of Economic Projections (SEP) released Wednesday showed a bias toward one more interest rate hike this year and revealed the Fed now sees interest rates remaining higher than initially thought [than who thought? the central bank?] in both 2024 and 2025.
Lee disagrees with one of the main factors driving the market action. The Federal Reserve's updated Summary of Economic Projections (SEP) released Wednesday showed a bias toward one more interest rate hike this year and revealed the Fed now sees interest rates remaining higher than initially the central bank initially thought in both 2024 and 2025.
Lee doesn't see this as a major issue, though, and said higher rates for a more sustained period in the Fed's forecast makes sense given the Fed's boost to its outlook for Gross Domestic Product (GDP).
Fed Chair Jerome Powell noted during his press conference that economic growth — which the Fed now sees hitting 2.1% this year, up from its 1% increase in June — would be the driver for another rate hike, not inflation.
"We've seen inflation be more persistent over the course of the past year, but I wouldn't say that's something that's appeared in the recent data," Powell said. "It's more about stronger economic activity, I would say. So if I had to attribute one thing, again, we're picking medians here and trying to attribute one explanation, but I think broadly stronger economic activity means we have to do more with rates."
To Lee, the marriage of higher interest rates and higher GDP not only makes sense, but could mean higher higher price to earnings ratios as the economy expands. Higher P/E's would then likely lead to higher higher stock valuations.
"A hawkish take would be inflation persistence went up and therefore Fed funds needs to stay high," Lee wrote in a Friday note to clients.
But, as Lee notes, the Fed's projections don't foresee an increase in inflation.
Afternoon trending stocks
Here are some of the stocks leading Yahoo Finance’s trending tickers page on Friday afternoon:
Ford (F): Shares of the automaker rose more than 2% Friday afternoon following an announcement by United Auto Workers President Shawn Fain that the union was expanding its "stand up" strikes at at noon, but only against GM and Stellantis, after the union said “real progress” was made with Ford in negotiations this week. GM (GM) fell by 0.3% and Stellantis (STLA) gained 0.4%.
Warner Bros. Discovery (WBD): The entertainment company fell by 2% as the Hollywood strike stretched to nearly 150 days. Although, the latest round of bargaining talks appeared to be advancing as negotiators for the Hollywood studios and for the Writers Guild of America are set to meet for a third day.
Stocks gain but head for losing week
Wall Street gained ground Friday afternoon in a reversal of the last two sessions when sentiment turned sour as the Fed reaffirmed its hawkish stance to keep interest rates elevated for several years. But the slight increases were more than offset by this week's poor performances.
Hollywood studios and striking writers to meet for 3rd day
The latest round of bargaining talks over the Hollywood strike appears to be advancing as negotiators for the Hollywood studios and for the Writers Guild of America are set to meet for a third day.
The renewed negotiations, which kicked off on Wednesday, have sparked hopes of a deal after the parties ceased communication for a month. Karen Bass, the mayor of Los Angeles, said in a statement Thursday that she felt "very encouraged" by the talks. This week’s huddle also carries a sense of urgency and optimism as the CEOs of Disney (DIS), Netflix (NFLX) and Warner Bros. Discovery (WBD) joined the negotiations, as has been widely reported.
Writers have been on strike for more than 140 days, and along with actors who joined the picket line in July, in a separate dispute, production in Hollywood has come to a stand still.
Pay, working conditions, and how workers are included in profit sharing in the streaming era are among the sticking points defining the prolonged dispute. Guarantees and restrictions on the use of artificial intelligence technology have surfaced as another point of disagreement.
Activision, Amazon and Alibaba: Stocks trending in morning trading
Here are some of the stocks leading Yahoo Finance’s trending tickers page on Friday morning:
AstraZeneca (AZN): Shares in the pharma group were up 2% after announcing that its breast cancer treatment outperformed chemotherapy in a Phase 3 study.
Services sector output hits a 8-month low
Activity in the US services sector is inching toward contraction.
The S&P Global Flash US Services Business Activity Index dipped to a reading of 50.2 in September according to new data release Friday. That's an 8-month low and down from 50.5 in August. Economists surveyed by Bloomberg had expected the services sector to rebound to a reading of 50.7 in September.
The composite PMI came in at 50.1, a 7-month low and down from 50.2 in August, driven by declines in the services sector. Meanwhile, the manufacturing index increased to 49.7 from 48.5 in September. Any reading above 50 for these indexes represents expansion in the sector; readings below 50 indicate contraction.
“PMI data for September added to concerns regarding the trajectory of demand conditions in the US economy following interest rate hikes and elevated inflation," S&P Global Market Intelligence Siân Jones said. "Although the overall Output Index remained above the 50.0 mark, it was only fractionally so, with a broad stagnation in total activity signaled for the second month running. The service sector lost further momentum, with the contraction in new orders gaining speed."
Stocks open mixed as Wall Street heads for losing week
Investors pulled stocks in both directions Friday morning with the major indexes heading for weekly losses as Wall Street grapples with the Fed's moves to keep rates higher for longer.