Stocks rally after Fed awaits market if history proves correct

(Bloomberg) — For equity investors mired in gloom, the Fed’s expected rate hike on Wednesday may actually bring some relief.

US stock markets were feeling the heat ahead of the Fed meeting, with the S&P 500 and Nasdaq 100 indexes down 6.2% and 7% respectively over the past six days, with an outside chance that Chairman Jerome Powell could adopt a more hawkish stance. To combat hyperinflation.

However, if history is any guide, markets may be due to rebound once the meeting is over and the dust has cleared.

Over the past 18 months, the S&P 500 has risen after eight out of 10 Federal Reserve decisions. In the days following Federal Reserve meetings in January, March and June, stocks rose between 6% and 9%, having fallen sharply in the previous period.

“The outlook is very hawkish, and the Fed could come out as expected and still be more dovish than anticipated,” Brad MacMillan, chief investment officer of Commonwealth Financial Network, said in comments via email. “That is likely to limit the downside of the market from this meeting and may provide some upside going forward.”

The Federal Reserve is expected to raise interest rates for the fifth time in a row this year, raising its benchmark borrowing costs to 3.25%. That pushed 10-year Treasury yields above 3.5%, the highest since 2011, forcing many investors to dump stocks.

But a very bearish situation may also be a source of support for stocks. Fund managers are the stockiest ever, while liquidity levels are at an all-time high, according to Bank of America’s latest monthly survey.

S&P 500 futures rose 0.3% by 7:04 am in New York, while Nasdaq 100 contracts were little changed.

“There has been so much speculation about the Fed’s next move that finally making a decision should provide some much-needed relief to investors,” said Danny Hewson, a financial analyst at AJ Bell. “If you stick to the scenario and offer another 75 basis points to pick up the rally then the markets are likely to rally somewhat, in part because the specter of a full percentage point rise has not materialized.”

Another measure, the CFTC’s S&P 500 net non-trading futures, also shows a very negative view, reaching levels last seen during the downturns of 2008, 2011, 2015 and 2020. These are often viewed as The gloomy sentiment as a conflicting indicator, indicates a recovery.

“Strong earnings, lower investor position and well-established long-term inflation expectations should mitigate any downside in risky assets from here,” strategists at JPMorgan Chase & Co. led by Marko Kolanovic said in a note on Monday.

Market technical indicators may also be bottoming soon, especially on technology stocks. The high-tech Nasdaq 100 is down 27% this year, and about 16% of its components are currently trading just above its 200-day moving average.

The analysis shows that this kind of lower technical range has coincided with previous market lows – with the exception of 2008.

Not everyone trusts that a hike is imminent. US stock valuations remain high compared to history and with previous economic downturns, keeping some investors wary of increased exposure while the Federal Reserve continues to raise interest rates.

“We expect more policy tightening than causing a recession,” Wei Lee, chief global investment analyst at BlackRock, said in a note on Monday. It has a tactical underweight position in relation to stocks, because “recession risks are still not taken into account.”

According to Nomura quantitative analyst Yoshitaka Soda, supply and demand dynamics among speculative investors are creating US stocks for more flexibility, with macro funds building short positions right after the latest US inflation data. Suda said in a note that macro funds “will remain on the short side in US stocks at least until employment data” on October 7.

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