Stock Market Volatility: Schwab’s Quick Take

U.S. stocks fell Friday, extending a run of weekly losses into its third straight week, as investors reacted to a handful of disappointing earnings reports and the Federal Reserve’s increasingly aggressive language about future interest rate increases. The losses were broad-based, with all 11 industrial sectors tracked by S&P ending lower. With its nearly 2.8% drop on Friday, the S&P 500® Index is now down 10.4% for the year so far.

Markets have grown more volatile as the Fed’s plans for tamping down historically high levels of inflation have evolved in the face of persistent price increases. Fed Chairman Jerome Powell suggested Thursday that the central bank may be envisioning a quicker series of rate hikes than was previously expected. Markets are now bracing for a half-point increase in May—a much sharper move than the quarter-point hike in March—with more tightening to come later in the year.

“We’re likely to see more spikes in volatility as the Fed embarks on a more aggressive pace of rate hikes, even as it starts to shrink its behemoth $9 trillion balance sheet,” says Liz Ann Sonders, Schwab’s chief investment strategist. “As monetary conditions tighten against a backdrop of high oil prices, war in Ukraine, and a lingering pandemic, the risk of recession increases. Equity investors should limit their risk-taking and use rebalancing to maintain strategic allocations.”

U.S. stocks: Not all is as it seems

  • The mid-March rally in U.S. stocks wasn’t as strong as it appeared, as more-defensive sectors and more-speculative areas of the market outperformed the more-cyclical sectors we’d expect to see leading a sustained rise in the benchmark indexes.
  • Sector volatility and a rapid turnover in sector leadership are likely to continue, given all the sources of uncertainty hitting the market. Schwab recommends stock investors stick with a sector-neutral approach for the time being.