Why stocks prices are crashed after the FOMC on May 2022?

Photo by Markus Spiske on Unsplash

Thursday, May 5 US stocks plummeted. The Dow Jones Industrial Average is -3.12%, the Nasdaq Composite is -4.99%, the S & P 500 is -3.56%, and so on.

However, none of the three indexes have updated this year's lows, and it cannot be judged that the market has bottomed out.
(Latest price on 6th May is lower than year’s low, but I think this is due to weekend effect.)

It back to neutral position from the May 4th buying, which is by investors who were excited by the comment “I’m not thinking of raising rates by 0.75%” at a press conference by Chairman Jerome Powell after the FOMC. However, I don’t think it’s a new phase just because the market is “come and go”.

Today, the lower price is due to the fact that the price of crude oil was bought by about + 3% in the morning because the OPEC did not increase production significantly and announced a small increase in production as before.

This rekindled inflation concerns, with 10-year bond yields above a psychologically important milestone of 3.00%. Seeing that, the stock was flooded with sales.

In other words, that was a backlash to the overbought market on Wednesday.

The good news is that the Federal Reserve isn’t thinking about a 0.75% rate hike, but there will still be 0.50% rate hikes in a row at the FOMC in June and July. That has already been implied, and when combined with the 0.50% rate hike in May, there will be three consecutive 0.50% rate hikes. This is extremely unusual.

The Fed attaches great importance to financial conditions in determining future policy rates. Think of financial conditions as the ease with which a company can borrow money. Banks are reluctant to lend money to tighter financial conditions. In addition, the situation where it is difficult for companies to raise funds with stocks and bonds may be included in the category of tighter financial conditions. In any case, the Fed is worried about a crunchy mood.

In that sense, the low stock prices seen in today’s market will lead to tighter financial conditions. Therefore, it is natural to think that if this situation continues, the Fed will not be involved and will turn into doves.

Sentiment indices such as the Put Call Ratio and the VIX Index are nearing a reversal of the market, but they are not extreme numbers yet and make us feel that they are “not boiled down”. The market reversal is near, but … I think it’s a situation that lacks a decisive hit.