Will a Fed rate hike be a ‘clearing event’ for the US stock market? What Investors Are Watching for Wednesday

Some analysts say a little clarity from the Federal Reserve on Wednesday on the likely size and scope of future rate hikes could be a balm for the fall in the US stock market.

Sheriff Hamid, a Jefferies strategist, said in a note last week that the meeting “could be set up as another ‘clearing event’.”

“People are very negative, and rising expectations for an increasingly hawkish Fed has us starting to think that a balanced sounding chair may provide some short-term relief from Powell speaking up after the expected 50 bp (basis point) rise,” they wrote. “Indeed, the worse the market behaves at the meeting, the more likely it is that such a relief event becomes.”

The stock was relatively well-behaved on Tuesday, ending a choppy session with small gains. But they ended last week on a sour note, with Friday’s sale sending the S&P 500 SPX,
+0.48%
In its second market correction of 2022.

The large-cap benchmark closed at its lowest level since May 19 of last year, and the Dow Jones Industrial Average (DJIA),
+0.20%
fell to its lowest level since March 14. technology- and growth-oriented NASDAQ Composite Comp,
+0.22%,
Already in a bear market, Friday ended at its lowest level since November 30, 2020.

There was some respite in the selling in the Treasury after the yield on the 10-year note TMUBMUSD10Y,
2.978%
Monday touched 3% for the first time since December 2018, but was unable to rise above the psychologically significant range. A halt in the steady rise in Treasury yields was credited with providing some respite to stocks.

The Fed is almost certainly seen to give up 50 basis points, or half a percentage point, when it releases its policy statement Wednesday at 2 p.m. Eastern. The Fed, which usually moves rates in quarter-point increases, hasn’t given a half-point increase since 2000. It is also expected to expand its plan to shrink its nearly $9 trillion balance sheet, hitting a pace of $95 billion a month. After a short ramp-up.

If that scenario materialises, it “should not cause a new sell-off in the stock, as it is already priced in the S&P 500 at current levels,” wrote Tom Essence, founder of Sevens Report Research, in a note. “Based on other news, we may see a mild relief rally in the S&P 500 (rumored sell/buy news) but I wouldn’t expect anything substantial unless there is other good news on the Ukraine or China lockdowns. “

Analysts said investors would be highly sensitive to Powell’s comments about the potential for growth of 75 basis points in future meetings.

Reading: Fed on track for biggest rate hike since 2000

Jefferies’ Hamid argued for short-term relief, something that even some of Wall Street’s biggest bearers have acknowledged could happen once the Fed’s ruling out.

“On the positive side, the market is currently so high, any good news could lead to a vicious bear market rally. We can’t rule out anything in the short term, but we want to make it clear that this bear market is complete. has not happened, in our view,” analysts led by Mike Wilson of Morgan Stanley wrote in a note.

He said the S&P 500 could drop as low as 3,460, the 200-week moving average, if further 12-month earnings per share begins to fall on margins and/or bearish concerns.

See: ‘You don’t want to own stocks and bonds’ in this environment: Paul Tudor Jones

Matthew Tuttle, chief executive and chief investment officer of Tuttle Capital Management, told MarketWatch in an email that the S&P 500 meets the traditional definition of a correction — a decline of 10% from the recent high — of the previously high-flying “FANG” underlying. Performance “Stocks indicate that a bear market is already underway. 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%

Google,
+0.64%,

Apple Inc.’s fall last week below the 200-day moving average, widely seen as an indicator of an asset’s long-term trend, is “a big problem.”

“We’ll probably see the Fed bounce around, but another leg down is expected, and if [investors]Keep selling FAANGs, then everyone will realize that this is really a bear and not a correction.

Read also: By how much can the Fed raise interest rates before the recession hits? This chart suggests a lower range.

Leave a Reply