A little clarity from the Federal Reserve on the likely size and scope of future rate increases on Wednesday could be a balm for a bruised U.S. stock market, according to some analysts.
The meeting could set up as “yet another ‘clearing event,’” said Sherif Hamid, a strategist at Jefferies, in a note last week.
“Folks are very negative, and the escalating expectations for an increasingly hawkish Fed start to have us thinking that a balanced sounding Chair Powell speaking after the expected 50 bp (basis point) hike could create some short-term relief,” he wrote. “Indeed, the worse markets behave into the meeting the more likely that kind of relief event becomes.”
Stocks were relatively well-behaved Tuesday, ending a choppy session with small gains.
But they ended last week on a sour note, with a Friday selloff sending the S&P 500 SPX, +0.48% into its second market correction of 2022. The large-cap benchmark closed at its lowest since May 19 of last year, and the Dow Jones Industrial Average DJIA, +0.20% fell to its lowest close since March 14. The tech- and growth-oriented Nasdaq Composite COMP, +0.22%, already in a bear market, ended Friday at its lowest since Nov. 30, 2020.
A selloff in Treasurys saw some respite after the yield on the 10-year note TMUBMUSD10Y, 2.975% touched 3% on Monday for the first time since December 2018 but was unable to rise above the psychologically important threshold. A halt in the relentless rise in Treasury yields was credited with giving stocks some relief.
The Fed is seen as almost certain to deliver a 50 basis point, or half a percentage point, increase when it issues its policy statement at 2 p.m. Eastern on Wednesday. The Fed, which usually moves rates in quarter-point increments, hasn’t delivered a half-point rise since 2000. It’s also expected to detail its plan to begin shrinking its nearly $9 trillion balance sheet, hitting a pace of $95 billion a month after a short ramp-up.
If that scenario materializes, it “should not cause new selling in stocks simply because this is already priced into the S&P 500 at current levels,” wrote Tom Essaye, founder of Sevens Report Research, in a note. “Depending on other news, we could see a mild relief rally in the S&P 500 (sell the rumor/buy the news) but I wouldn’t expect anything substantial unless there’s other good news on Ukraine or China lockdowns.”
Investors will also likely be highly sensitive to Powell’s remarks around the potential for a 75 basis point rise at future meetings, analysts said.
Jefferies’ Hamid argued for short-term relief, something that even some of Wall Street’s biggest bears have acknowledged could come once the Fed decision is out of the way.
“On the positive side, the market is currently so oversold, any good news could lead to a vicious bear market rally. We can’t rule anything out in the short term but we want to make it clear this bear market is far from completed, in our view,” wrote analysts led by Morgan Stanley’s Mike Wilson, in a note.
They said the S&P 500 could fall as low as 3,460, the 200-week moving average, if forward 12-month earnings per share start to fall on margin and/or recession concerns.
Matthew Tuttle, chief executive and chief investment officer at Tuttle Capital Management, told MarketWatch in an email that while the S&P 500 meets the traditional definition of a correction — a drop of 10% from a recent high — the underlying performance of previously highflying “FAANG” stocks signals a bear market is already under way. FAANG is an acronym for Facebook Inc. parent Meta Platforms Inc. FB, +0.43%, Amazon.com Inc. AMZN, -0.20%, Apple Inc. AAPL, +0.96%, Netflix Inc. NFLX, +0.21% and Google parent Alphabet Inc. GOOG, +0.83% GOOGL, +0.64%.
Apple Inc.’s fall last week below it’s 200-day moving average, widely viewed as an indicator of an asset’s long-term trend, is “a huge problem,” he said.
“We will probably see a bounce around the Fed but expect another leg down, and if [investors]continue to sell the FAANGs, then everyone will realize this is actually a bear and not a correction.