A Stock Market Reality Check
Wall Street JournalMay 06, 2022
On Thur., the stock market pulled back sharply as the Dow Jones Industrial Average dropped nearly 3.1% - more than 1k points - while the S&P 500 lost 3.6%, and the Nasdaq Composite decreased by 5%.
This is a dramatic reversal after markets posted large gains on Wed. following a half-percentage rate hike by the Federal Reserve and an announcement that the central bankers weren't yet considering a rate increase of 75 basis points.
Turbulence is expected in the market, and the recent volatility isn't surprising; nor does it suggest that the Fed is wrong to tighten. Markets are simply trying to make sense of a policy environment that it hasn't seen in decades.
While markets are no stranger to volatility, the whiplash over the last two days is unparalleled. Once an anchor of stability for the market, the central bank is now its chief antagonist. Although the Fed Chair expressed confidence, the risk of a recession is a threat that investors can't ignore.
There is a 50% chance that the rate of inflation in the US will be at least 5.80% in 2022, according to the Metaculus prediction community.