Stocks face more volatility in week ahead, after hawkish Fed puts focus on next jobs report

Published Fri, Aug 26 20224:52 PM EDTUpdated Fri, Aug 26 20226:31 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Markets could remain volatile in the week ahead, as August winds down and investors turn their attention to next Friday's jobs report. The August employment report is expected to show strong job growth, and it will most certainly be a major factor in the Federal Reserve's decision on how much to raise interest rates at its Sept. 20 and 21 meeting. According to Dow Jones, economists expect 325,000 jobs were added, down from the surprisingly strong 528,000 in July. Stocks were rocked Friday by comments from Fed Chairman Jerome Powell , who said the Fed plans to keep higher rates in place to fight inflation. The markets had expected a Fed 'pivot,' where it could slow down hikes, then eventually reverse course and cut rates in the latter part of next year. The S & P 500 fell 3.4% for a weekly loss of 4%, and the tech heavy Nasdaq was hit even harder, down 3.9% Friday and 4.4% for the week. Tech was the worst-performing major sector, down 5.6% for the week, and communications services was second worst, 4.8%.off "I think with the next week and the data that's coming in, and then a three-day weekend, I think to say you're expecting there will be volatility is a relatively easy call, and by definition, that means both directions," said Liz Ann Sonders, chief market strategist at Charles Schwab. Sonders said in addition to the Fed's hawkish rate stance, stocks will have to adjust to increasingly lower expectations for earnings. Besides jobs data, there are ISM manufacturing data and vehicle sales Thursday. On Tuesday, there is S & P/Case-Shiller home price data, consumer confidence and job openings reports. There are also a few earnings, including Best Buy and Chewy Tuesday, Express on Wednesday and Campbell Soup Thursday. Jobs, jobs, jobs But it's the jobs report that will matter most to markets. Michael Gapen, chief U.S. economist at Bank of America, said the employment data and the consumer price index Sept. 13 are the most important data points the Fed will consider as it decides how much to raise interest rates Sept. 21. The market has been debating whether the Fed will raise by 0.50 of a percentage point or 0.75, as it did in June and July. Powell did not help clarify what the Fed will do, but he did say it depends on the data. "He made it clear 0.75 is on the table, but I think we already knew that," said Gapen of Powell. "The report next Friday is going to tell us whether they're doing 50 or 75." Gapen said if the employment report comes in as expected, "it's going to be a coin flip between 50 and 75. The Fed doesn't like to surprise us on rate hikes. They'll let us know," he said. Powell pointed to the labor market in his comments, noting that reducing inflation is likely to create a sustained period of below-trend growth. "Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said. Treasury yields were higher in the past week as the market adjusted to a more hawkish Fed even before Powell spoke. The 10-year yield was at 3.02% Friday after reaching 3.12% on Thursday. The 2-year yield rose to 3.38%. "The move up in the [stock] market corresponded with the move down in the 10-year yield," Sonders said. She said that trade began to reverse as yields rose, and Powell's hawkish commentary confirmed that move. "I don't think we're out of the woods just yet," she said. Sonders said the rally into August was healthier from a breadth perspective, before the S & P 500 turned lower after hitting resistance last week at 4,325, right at its 200-day moving average. The 200-day is literally the average closing price of the last 200 sessions, and it would have been a positive momentum signal if the index had closed above it. "You had a sort of technical failure and sentiment, like in the meme stocks, had gotten quite frothy," she said. "That in and of itself helped to bring on a corrective phase." Technically speaking Scott Redler, partner with T3Live.com, said the next challenge for the S & P 500 could be around its 50-day moving average, at 3,996. The S & P closed Friday at 4,057. "The next target that will be in play next week is the 50-day. Now we're in a no man's land. Nobody is in a rush to buy here. We pulled in from 4,325. The market tried to bounce ahead of Jackson Hole," he said. If the S & P falls below the 50-day and holds there, it would be seen as a sign of more losses for the index. Stocks are also about to enter their historically worst month of the year Thursday, as the calendar rolls into September. According to CFRA, the month of September is only positive 44% of the time, and the average performance for the S & P 500 in the month since 1944 was a decline of 0.6%. September is one of two months with a negative average performance. The other is February, which has an average decline of 0.2%. Sam Stovall, chief investment strategist at CFRA, said he studied the performance of the S & P in September in years with the worst six months start to the year. "Fifty percent of the time they declined, and the average decline was 2.1%," he said. Stovall said September has a chance of doing better this year. "Since so many people are expecting a bad September, I wonder if it ends up being ho hum or even positive, only because of expectations," he said. "There's so many reasons why the market does poorly. Maybe it does poorly leading up to the FOMC meeting and starts to take off after that." Once the third quarter ends Sept. 30, the fourth quarter is expected to be positive. That is, in part, because the fourth quarter in a midterm election year is the best performing of all quarters in the presidential cycle, he noted. Week ahead calendar Monday 2:15 p.m. Fed Vice Chair Lael Brainard speaks Tuesday Earning s: Best Buy , Baidu, Bank of Montreal, Hewlett Packard Enterprises, Ambarella, ChargePoint, Chewy , PVH 8:00 a.m. Richmond Fed President Tom Barkin speaks 9:00 a.m. S & P/Case-Shiller home prices 9:00 a.m. FHFA home prices 10:00 a.m. Consumer confidence 10:00 a.m. JOLTS 11:00 a.m. New York Fed President John Williams speaks Wednesday Earnings: Brown-Forman, Designer Brands, Express , Vera Bradley, Five Below, Nutanix, Pure Storage, MongoDB, Okta, Cooper Cos, C3.ai 8:00 a.m. Cleveland Fed President Loretta Mester speaks 8:15 a.m. ADP 9:45 a.m. Chicago PMI 6:00 p.m. Dallas Fed President Lorie Logan speaks 6:30 p.m. Atlanta Fed President Raphael Bostic speaks Thursday Earnings: Hovnanian , Hormel Foods, Campbell Soup, Lands' End, Ciena, Signet Jewelers, Broadcom, Pager Duty, Weibo, Ollie's Bargain Outlet Monthly vehicle sales 8:30 a.m. Initial claims 8:30 a.m. Productivity and costs 9:45 a.m. Manufacturing PMI 10:00 a.m. ISM manufacturing 10:00 a.m. Construction spending 3:30 p.m. Atlanta Fed's Bostic speaks Friday 8:30 a.m. Employment report for August 10:00 a.m. Factory orders