Key Words: ‘A violent unwinding of crowded positions’: Dow plunges 1,000 points as investors brace for more volatility and uncertainty

The Federal Open Market Committee’s hawkish tone has rattled markets. Wednesday’s rate hike was the most aggressive tightening of monetary policy in a single meeting since 2000.

Michael Shaoul, CEO at Marketfield Asset Management, wrote in a research note, “There was nothing dovish about the message from the FOMC. Even so, the delivery of the certainty of a 50 basis-point hike acted as a catalyst for a violent unwinding of crowded positions.”

Investors are concerned about the Fed’s delicate balancing act: raising interest rates to combat inflation without pushing the U.S. economy into a recession. When the Fed raises rates, it becomes more difficult for millions of consumers to borrow. When consumers feel confident about borrowing, they are more likely to spend.

Case in point: The interest rate on a 30-year fixed-rate mortgage averaged 5.27% for the week ending May 5, according to data released by Freddie Mac
FMCC,
-0.46%
on Thursday. That’s up 17 basis points from the previous week — one basis point is equal to one hundredth of a percentage point, or 1% of 1%.

This represents the highest point for the benchmark 30-year mortgage product since August 2009. That, some analysts say, marks the end of the pandemic-related housing boom.

“The consequences we risk in policy tightening are potential recession, potential lost jobs and wages, and clearly tighter financial conditions that will weigh on virtually all financial markets,” Rick Rieder, chief investment officer of global fixed income at Blackrock, wrote in a note on Wednesday.

“The Committee is highly attentive to inflation risks,” the FOMC said in an updated statement on Wednesday afternoon. “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run.”

Then there’s Russia’s war in Ukraine. “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain,” the FOMC added. “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity.”

And despite people going about their lives as normal or close to normal, COVID-19 has not gone away, and the world is still in the process of learning to live with the virus. “In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” Wednesday’s FOMC statement warned.

On Thursday, the World Health Organization said new estimates reveal that the full death toll associated directly or indirectly with the COVID-19 pandemic between Jan. 1 of 2020 and Dec. 31 of 2021 now stands at 15 million people.  Johns Hopkins University’s estimate of COVID-related fatalities over that same period as of Thursday: 6.24 million.

There were, however, some notes of optimism on Thursday. “Given our base case of moderating growth and inflation, we think equity markets will finish the year higher than current levels,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote. “We continue to favor areas of the market that should outperform in an environment of high inflation, rising rates, and elevated volatility.”