The weekend reads: How to position your investments before the Federal Reserve causes a bear market

Will the Fed rate hike be a “compensating event” for the struggling US stock market? What investors expect on Wednesday

Some clarity from the Federal Reserve on the likely size and scope of future rate hikes on Wednesday could be a balm for a battered U.S. stock market, some analysts said.

The meeting could set up as “another ‘compensation event,'” Sherif Hamid, strategist at Jefferies, said in a note last week.

“People are very negative, and rising expectations of an increasingly belligerent Fed are starting to make us think that a balanced-sounding Chairman Powell speaking after the expected 50 basis point hike (bps) could create short-term relief,” he wrote. “Indeed, the worse the markets behave during the meeting, the more likely this type of relief event becomes.”

Stocks did relatively well on 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%
in its second market correction of 2022.

The large-cap benchmark closed at its lowest since May 19 last year, and the Dow Jones Industrial Average DJIA,
+0.20%
fell to its lowest close since March 14. The Nasdaq Composite COMP, focused on technology and growth,
+0.22%,
already in a bear market, ended Friday at its lowest since November 30, 2020.

A sell-off in Treasuries saw some respite after the 10-year note TMUBMUSD10Y yielded,
2.999%
touched 3% on Monday for the first time since December 2018 but could not break above the psychologically important threshold. A halt in the relentless rise in Treasury yields has been credited with providing relief to equities.

The Fed is considered almost certain to provide a 50 basis point, or half a percentage point, increase when it releases its policy statement at 2 p.m. Eastern on Wednesday. The Fed, which typically changes rates in quarter-point increments, hasn’t hiked half a point since 2000. It’s also expected to detail its plan to start shrinking its balance sheet by nearly $9 trillion. dollars, reaching a rate of 95 billion dollars per month. after a short ramp-up.

If this scenario materializes, it “should not result in further stock selling simply because this is already priced into the S&P 500 at current levels,” Tom Essaye, founder of Sevens Report Research, wrote in a note. “According to other news, we might see a slight relief bounce in the S&P 500 (sell the rumor/buy the news) but I wouldn’t expect anything substantial unless there are other good news about lockdowns in Ukraine or China.”

Investors will also likely be very sensitive to Powell’s remarks about the potential for a 75 basis point hike in upcoming meetings, analysts said.

Lily: Fed on track for biggest rate hike since 2000

Jefferies’ Hamid argued for short-term relief, which even some of Wall Street’s biggest bears have acknowledged could come once the Fed’s decision is ruled out.

“On the positive side, the market is currently so oversold that any good news could lead to a vicious bearish rally. We can’t rule out anything in the near term, but we want to make it clear that this bear market is far from over, in our view,” the analysts led by Morgan Stanley’s Mike Wilson wrote in a note.

They said the S&P 500 could drop as low as 3,460, the 200-week moving average, if 12-month earnings per share begin to decline due to margin issues and/or a recession.

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

Matthew Tuttle, managing director and chief investment officer at Tuttle Capital Management, told MarketWatch in an email that if the S&P 500 meets the traditional definition of a correction — a 10% decline from a recent high — The underlying performance of previously high-flying “FAANG” stocks signals that a bear market is already underway. FAANG is the acronym for the parent company of Facebook Inc. 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 its 200-day moving average, widely seen as an indicator of an asset’s long-term trend, is “a huge deal,” he said.

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

Read also : How far can the Fed raise interest rates before a recession hits? This graph suggests a low threshold.

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