In normal times the traders name a stock they would buy the next day. But on Monday’s program, all four traders named stocks they would sell. Such is the stock market in 2023.
The stock market began the year with a strong and surprising rally. But then on Friday, February 3, the Labor Department reported the U.S. economy created more than 500,000 jobs in January.
Ordinarily, that would be great news since it means a half-million more Americans are gainfully employed. But the news sparked a sharp sell-off on Friday with stocks beginning this week drifting even lower.
The reason? The Federal Reserve wants unemployment to rise, not fall. Its policy of raising interest rates is designed to slow the economy to reduce inflation.
Many market observers have said Wall Street traders had convinced themselves that inflation is easing and the Fed would not only stop raising rates but might even cut rates later this year. Friday’s employment report was a cold splash of reality.
Inflation fight far from over
Neel Kashkari, president of the Minneapolis Federal Reserve Bank, says the jobs report is strong evidence that the fight against inflation isn’t over and more pain could be ahead.
“We have a job to do. We know that raising rates can put a lid on inflation,” Kashkari said on CNBC Tuesday morning. “We need to raise rates aggressively to put a ceiling on inflation, then let monetary policy work its way through the economy.”
The Fed started raising rates about a year ago when the federal funds rate was practically 0%. With nearly free money, the stocks of unprofitable companies soared, especially during the pandemic. The cost of borrowing money for these companies is now much higher, weighing on stock prices.
The Fed’s key interest rate is now floating between 4.5% and 4.75%. Kashkari says the rate should keep rising to around 5.4%.
“So far we’re not seeing much of an imprint of our tightening to date on the labor market,” he said. “There’s some evidence that it’s having some effect, but it’s pretty muted so far.”
Digital assets are suffering
Stocks aren’t the only asset class taking a beating in a rising interest rate environment. Home prices in many housing markets are well off their record highs because many would-be buyers can’t afford the higher mortgage rates.
Digital assets have also suffered. For example, Bored Ape Yacht Club, often referred to as Bored Apes, is a non-fungible token (NFT) collection based on the Ethereum blockchain. The collection features pictures of cartoon apes that are generated by a computer algorithm.
During the pandemic, it and other NFTs were extremely popular and prices surged. In January 2022 Bored Apes was worth a reported $346 million. A year later, its value had dropped 80% to $67.7 million.
Digital currencies such as bitcoin are also sharply lower over the last 12 months. A year ago bitcoin sold for $48,000. This week the price of bitcoin is just under $23,000.