US stock rally set for date with Federal Reserve reality

Betting on the less aggressive Fed has been a dangerous undertaking this year. Stocks have repeatedly rallied on hopes of a so-called Fed pivot, only to find fresh evidence of persistent inflation or a renewed crush on a central bank rate hike to keep pace.

Pockets of softness in the US economy have fueled hopes of recent rate hikes, as well as signs that some of the world’s central banks may be nearing the end of their rate hike cycles. Meanwhile, cash-heavy investors fearing of missing out on a sustained rally contributed to the rally, market participants said.

“The market is beginning to recognize that there is an end game to this huge global tightness cycle,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.

The S&P 500 was on pace with a gain of more than 3% at the end of the week, as investors shrugged off brutal earnings reports from companies like Amazon, Microsoft, Google parent Alphabet and Facebook parent meta platform.

The benchmark index is up more than 8% from its most recent low, a move that coincides with a sharp rally in the US Treasury and a weakening of the dollar, reversing prevailing trends for most of the year.

A lower-than-expected rate hike by the Bank of Canada added to the global central bank’s hopes of a peak, as a member of the Bank of Mexico’s board warned against raising monetary policy to excessively restrictive levels.

While investors have widely factored in a 75 basis point increase on Wednesday at the end of the Fed’s two-day meeting, many will be looking for signs of future policy moves at Chairman Jerome Powell’s press conference, as his comments hit assets. prices have been affected. year.

For example, stocks rose ahead of the Fed’s conference in Jackson Hole, Wyoming in August, only to fall after Powell warned of an economic fallout from the Fed’s efforts to fight inflation.

“If their tone is as sharp and sharp as it was at Jackson Hole in August, it will certainly change the narrative rapidly,” said Art Hogan, chief market strategist at B Riley Wealth.

Next week will also test whether the disappointing earnings news in stocks can continue. More than 150 S&P 500 companies are due to report quarterly results next week, including Eli Lilly, ConocoPhillips and Qualcomm.

Investors will also watch next Friday’s monthly jobs report closely for signs of whether the Fed’s actions have affected the labor market.

Many investors believe it is too early to expect a slower pace of rate hikes. Analysts at UBS Global Wealth Management said the Fed has yet to see evidence of cooling inflation and labor market conditions and that they “continue to think that it is too early to signal a more indifferent stance from the Fed.”

“Conditions for an equity market bottom, including that rate cut and an economic trough, do not need to be on the horizon,” analysts at UBS said in a note.

Truist’s Lerner released a report Friday downgrading his view on equities from “neutral” to “less attractive” after the rebound. He said that although stocks have become a whole lot cheaper this year, “they have actually become more expensive than bonds given the sharp rise in interest rates.”

However, for now, it seems that the bulls are up. According to Trade Alert data, an example of investor enthusiasm can be seen in the options market, where a month’s average daily volume of S&P 500 puts, typically used for defensive positions, is over at least four years. Makes fast calls with the smallest margin.

“The market is thinking good things,” said Christina Hooper, chief global market strategist at Invesco. “Jay Powell will either confirm it or give it away next week.” (Reporting by Lewis Kraskoff; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosbashvili and Nick Ziminsky)