What happened
Shares of most stocks continued to fall to end the week as investors were nursing a hangover from the Federal Reserve's September meeting, which ended with another large rate hike.
Shares of the large payments rail Mastercard (MA -0.07%) traded roughly 2.75% lower as of 2:58 p.m. ET today. Shares of Citigroup (C -0.32%) traded more than 4.5% lower, and shares of Goldman Sachs (GS -0.23%)were down nearly 5%.
So what
As most investors expected, the Fed raised its benchmark overnight lending rate, the federal funds rate, by 0.75% at the conclusion of its September meeting Wednesday. That was actually good news, because some had feared that the Fed might raise rates an even bigger 1%.
Image source: Getty Images.
But markets fell anyway after seeing the Fed's future rate projections and hearing Fed Chair Jerome Powell's comments following the meeting. The Fed's so-called "dot plot," which shows the median forecast of where its members expect the federal funds rate to go in the near future, has the Fed's benchmark rate ending the year at 4.4% and then rising to 4.6% in 2023. With only two meetings left this year, that implies another 0.75% rate hike, which would be the fourth this year, and a half-point hike as well.
Powell also said in a press conference following the Fed's meeting that the chances for engineering a soft landing would likely "diminish to the extent that policy has to be more restrictive."
"The market has been transitioning clearly and quickly from worries over inflation to concerns over the aggressive Federal Reserve campaign," said Quincy Krosby of LPL Financial, according to CNBC. "You see bond yields rising to levels we haven't seen in years -- it's changing the mindset to how does the Fed get to price stability without something breaking."
Banks and financials are pretty closely linked to the economy, so I'm not surprised to see Mastercard, Goldman, and Citigroup all taking a hit this week.
Mastercard has the ability to hedge inflation because it reaps higher transaction fees if purchases across its network rise. However, if there is a more severe recession and overall consumer spending slows, that would not bode well for the business.
Banks like Citigroup and Goldman have to not only worry about a slowdown in spending but also slowing loan growth and a rise in loan losses in a more severe economic scenario. Goldman and Citigroup also have sizable investment banking businesses, which have not fared well as initial public offerings and other issuances have dried up this year. Reports of mergers and acquisitions activity slowing also do not bode well for investment banks, either.
Now what
There continues to be a lot of uncertainty in the environment as investors worry about what happens when all of the Fed's rate hikes fully hit the economy. The market seems to think it is going to be increasingly difficult to avoid some kind of more intense recession.
While I think the next six months are hard to predict, I happen to like all three of these stocks long term.
Citigroup is executing a multiyear transformation strategy that I do think has promise; Goldman has long been an investment banking powerhouse and is attempting to diversify its earnings; and Mastercard has built a strong moat that few competitors will be able to penetrate.
