Wall St Week Ahead Rocky Stock Market Faces Test From Fed With Eyes On Tightening Plans

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A Wall Street sign is displayed outside the New York Stock Exchange amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, USA. , April 16, 2021. REUTERS/Carlo Allegri

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NEW YORK, April 29 (Reuters) – A volatile stock market faces a critical test next week, when the U.S. Federal Reserve is expected to raise interest rates and provide more information on its plans to tighten monetary policy. to combat rising inflation.

Concerns about an increasingly hawkish Fed have helped drag the benchmark S&P 500 (.SPX) down 13.3% so far in 2022, its steepest drop in four months since 1939.

While investors have raised expectations of how aggressively the central bank can tighten monetary policy, many worry that the Fed may not be able to keep the economy afloat as it battles the worst inflation in nearly four decades.

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Compounding concerns about monetary policy, investors have been riled by everything from rising bond yields to the war in Ukraine and, more recently, lockdowns in China. The market is also entering a historically weaker six-month period for stocks.

“I think we’re going to be facing more uncertain, choppy and volatile markets here for a while longer, just because of the uncertainty,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab in Austin, Texas. , who said that “things changed direction right at the beginning of the year”, after a strong fourth quarter at the end of 2021.

Investors widely expect the Fed to raise rates by 50 basis points when the central bank meeting concludes on Wednesday. They are also bracing for signals from Fed Chairman Jerome Powell on the future path of interest rates, the central bank’s plans to shrink its balance sheet and his outlook on when inflation will recede. Policymakers raised rates in March by 25 basis points, the first increase since 2018. read more

“If the Fed continues to expect high levels of inflation and doesn’t see it moderating in the future, it will be a concern for investors,” said Michael Arone, chief investment strategist at State Street Global Advisors. “It will mean that the Fed will continue to raise rates and tighten monetary policy, which the market is expecting, but perhaps even more aggressively.”

Beyond next week’s action, policymakers have coalesced around a general increase in the fed funds rate to at least 2.5% by the end of the year. read more

Crucial to the tightening plans will be how persistent officials view the current pace of inflation after March’s consumer price index showed an 8.5% annual rise, the biggest rise in more than 40 years.

Given that there are signs that inflation has started to peak, said Kei Sasaki, senior portfolio manager at Northern Trust Wealth Management, “if there’s an even more resounding hawkish tone at that meeting, then that could certainly be seen.” as negative”.

The sell-off accelerated on Friday as the S&P 500 fell 3.6%, its biggest one-day drop since June 2020, after a disappointing earnings report from Amazon (AMZN.O) sent shares of the retail giant lower. electronic commerce fell 14%.

The month of April marked the S&P 500’s biggest monthly decline since the start of the coronavirus pandemic in early 2020, while the tech-heavy Nasdaq (.IXIC) posted its biggest monthly decline since the 2008 financial crisis.

As investors have braced for tighter monetary policy, bond yields have risen this year, with the yield on the 10-year Treasury note up around 2.9% from 1.5% at end of 2021.

That has particularly pressured growth and technology stocks, whose valuations depend on estimated future cash flows that are undermined when investors can earn more from risk-free bonds. The Russell 1000 Growth Index (.RLG) is down 20% so far this year.

Meanwhile, investor sentiment is severe. The percentage of individual investors describing their six-month outlook on stocks as “bearish” rose to 59.4%, its highest level since 2009, according to the latest weekly survey from the American Association of Individual Investors.

To be sure, after the recent market crash, the Fed’s actions could provide some comfort. Following the Fed’s planned rate hike in March, the S&P 500 rallied more than 8% over the next two weeks.

Investors will be watching corporate results after a mixed week of earnings for large-cap companies. Reports from Pfizer (PFE.N), Starbucks (SBUX.O) and ConocoPhillips (COP.N) are due next week, among others.

With the change of calendar to May, seasonality is also emerging as a possible factor for investors. The S&P 500’s strongest six months of the year since 1946 have been November through April, when the index rose an average of 6.8%, according to a CFRA note earlier in the week.

By comparison, the index has gained just 1.7% on average from May to October.

More recently, however, the trends have not been as strong. Over the past five years, the S&P 500 averaged a 7.2% gain in the May-October period versus 5% in November-April, according to Reuters analysis.

“I don’t know how important seasonality is going to be this time,” said Jack Ablin, chief investment officer at Cresset Capital Management.