Blue Chip Stocks Lead Stock Market Lower After Powell Speech

Federal Reserve Chair Jerome Powell speaking in front of the Senate Banking Committee

(Image credit: Getty Images)

Stocks started Tuesday on shaky footing – and things only unraveled as Federal Reserve Chair Jerome Powell began his semiannual testimony in front of Congress. Prepared remarks from Powell indicated the Fed is ready to keep raising rates if economic data continues to come in strong. The commentary was not welcomed by investors, with the major benchmarks selling off sharply today.

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"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell wrote in a prepared statement for Congress, adding that "[i]f the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

Stocks sold off sharply in reaction to what was implied in the remarks. "To summarize his speech in one sentence: a 50 basis point hike in March is on the table," says Daniel Berkowitz, investment director for Prudent Management Associates. "While markets are still somewhat split on the magnitude of the next hike per data from CME FedWatch, this morning's comments make clearer that regardless of the next increase, the likelihood of a Fed pivot has been pushed further down the road."

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Critically, Powell's testimony creates even more uncertainty for investors ahead of this Friday's jobs report, as well as the next CPI report, which comes out ahead of the March 14 open.

"Three fresh rate rises in March, May and June now look likely and the chances of a steeper 0.5% hike later this month are increasing if the February jobs snapshot and consumer price data doesn't show significant signs of cooling," says Susannah Streeter, head of money and markets at Hargreaves Lansdown. "As borrowing costs are set to shoot up yet again, it'll pile more pressure on consumers and companies."

In single-stock news, WW International (WW) shares jumped 79.1% after posting earnings. Although the company formerly known as Weight Watchers reported a wider-than-expected net loss on lower-than-anticipated revenue in its fourth quarter, it said it was buying telehealth platform Sequence for $106 million. Sequence "helps subscribers access medications that aid in weight loss," including popular weight-loss drug Ozempic, says UBS Global Research analyst Michael Lasser. "This is a significant change in the business. While the deal could bring considerable upside, it also carries sizable risks."

As for the major benchmarks, the blue chip Dow Jones Industrial Average (-1.7% to 32,856) led the market lower as Walgreens Boots Alliance (WBA, -3.7%) slid on reports California is reviewing its relationship with the drugstore chain. This comes after WBA said it will not sell the abortion pill mifepristone in several Republican-led states. The broader S&P 500 fell 1.5% to 3,986, and the tech-heavy Nasdaq Composite shed 1.3% to 11,530.

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Today's comments from Powell "should come as no surprise to investors," says John Lynch, chief investment officer for Comerica Wealth Management. "Employment and consumption have been strong, while the easy gains in the battle against inflation have been made," Lynch says, adding that investors should start taking "higher for longer" interest rates seriously – and include quality investments in their portfolios, like those found in profitable small-cap stocks.

After a tough 2022, many of the best small-cap stocks are priced for outperformance. But if investing in any individual small company seems like a lot to stomach in an uncertain market, you can spread the risk around with these small-cap ETFs. Such funds offer investors a variety of ways to gain broad exposure to smaller companies with big growth potential.

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With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at a local investment research firm. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.