Are investors ignoring the Federal Reserve's warning?

This story was first published in the Before the Bell Newsletter of CNN Business. Subscribers, are you not? Sign up here. Clicking the same link will allow you to listen to the audio version of this newsletter.

CNN

The stock market fell last week, as there were several indications that the Federal Reserve would continue to raise rates in 2019.

The S&P 500 dropped 1.4% this week. The Dow Jones Industrial Average fell 1.7%, and the Nasdaq Composite fell 1.4%. The three major indexes have all ended weeks of gains which had propelled the S&P 500 to bull market territory, and sent mega-cap technology stocks to record highs.

What caused the losses last week? Federal Reserve Chair Jerome Powell told congressional leaders in testimony on Wednesday and Thursday the central bank is committed to keeping inflation below 2% and that they will likely increase rates twice more this year.

Futures traders currently price in only one rate hike for this year.

Investors who had expected a quarter-point hike were surprised when the Bank of England raised rates by a half-point.

Wall Street does not appear to be skittish despite the Fed’s hawkish signals, the BoE’s hike, and the losses of last week. The Cboe Volatility Index (VIX) is derived from S&P 500 options prices. It measures volatility expectations. Wall Street's fear index fell to 13.44 in the last week.

Even in the face of a general market decline, mega-cap tech stocks saw significant gains. Apple shares closed at a record high of $187 last Thursday.

Tom Graff is the head of investments for Facet Wealth. He says that investors have a different view on inflation. Investors, on the other hand, believe that while the Fed can indeed raise rates twice more if inflation continues to be high, inflation will continue to cool.

Recent inflation data confirms this expectation. The May Consumer Price Index shows that consumer prices rose last month at the lowest annual rate since March 2021. The May Producer Price Index revealed that wholesale inflation has cooled below the pre-pandemic level.

Graff said, "There's no fear that gripped us through 2022, that the Fed could hike us into oblivion."

The Fed may also signal more rate increases to maintain flexibility and minimize potential market volatility. Investors would not be as concerned if the Fed announced more rate increases and then did not make them.

Was the sell-off last week a one-off or the beginning of a new trend? The million-dollar question. No matter what direction stocks go, the path is unlikely to be linear.

Some signs suggest that the market is headed upwards. In recent weeks, the rally that was led by Nvidia, Microsoft and other mega-cap tech companies this year has expanded to include other asset categories, including small-cap stocks.

In recent weeks, the share of S&P 500 stocks trading above their 200 day moving averages has increased. This is a popular technical measure for market breadth.

While more than 60% are trading above the trend-line of the S&P 500, 'it is not enough to convince of a new bear market', wrote Liz Young of SoFi, who heads investment strategy.

Gina Bolvin of Bolvin Wealth Management Group says that the next test for stocks is likely to be the earnings season. This is especially true given that the earnings results have been better than expected so far this fiscal year, which has helped fuel the rally.

She said that a return to the fundamentals could and should drive this market higher.

Bitcoin price reaches new high in 2023

Bitcoin reached its highest level since about a month last Friday, rising to over $31,400 per coin before reversing its gains.

After the collapses at Silicon Valley Bank, Signature Bank, and other banks, investors began to flock to crypto to store their cash as an alternative.

Bitcoin's rise comes after several financial companies have appeared to venture into the crypto-market. BlackRock applied last week to register a bitcoin exchange-traded funds. EDX Markets launched its digital assets trading platform last week. The crypto exchange fund has financial backing from Charles Schwab, Fidelity Digital Assets, and Citadel.

Despite recent regulatory crackdowns on the crypto market, bitcoin's rally could be hampered.

Tuesday: Case Shiller's home price index (index of home prices) and new home sales.