The Fed introduced historic levels of financial engineering back in 2008-2009 to deal with the housing crash and a recession. Few folks - even economic experts - predicted that there would be trillions more in financial stimulus 12 years later and that rates would still be hovering at extremely low levels. However it is inevitable that the cycle will turn, and this was the week when the market started to appreciate that really is going to happen.
The inflation issue has been gaining traction recently, but many market players remained in denial about it. They embraced the idea that it was just going to be temporary as the economy ramps back up to 'normal' levels, but the Fed changed the tune at its policy meeting this week. It was clear the Fed members are ramping up not only predictions of short-term inflation levels but the likelihood of future rate hikes. The hikes are still down the road, but we are not going to be talking about them much more.
The negative market reaction isn't a huge surprise. In some ways, it could have been much worse. The dollar rose, commodities were slammed, banks took a hit, and value stocks lagged. Technology names held up relatively well, but the selling did take a toll on just about everything as it continues. There were some decent pockets of stock picking, and meme trading didn't totally blow up.
Starting back in February, the indices covered up some bear market action in various areas of the market. Many small-caps, growth names, and speculative plays were slaughtered while stodgy, big cap value did well. The action this week was a reversal of some of that action. ARK Innovation (ARKK) which is the poster boy for high beta, growth ended the day close to even while the DJIA took a hard hit.
There will be some reverberations of this shift in interest rate hikes in the weeks ahead, but the market is doing a good job of discounting it, and we'll see some new winners and losers emerge as the economic consequences become clear.
While it was a poor week for the market, the good news is that this shift was going to happen sooner or later, and now we can focus on trading in a new environment.
Have a great weekend. I'll see you on Monday.