Interest rate hikes tend to choke the stock markets. Good stock runs and tough central banks are not compatible, but the S&P 500 is challenging this theory, just after the last ten meetings. In eight out of ten appointments, he has registered strong promotions.
The stock markets quote expectations and due to the punishment that Wall Street accumulates, the S&P 500 and Nasdaq have received a cumulative drop of 6% and 7%, respectively, in the last days; investors expect a tough Fed. The market is pricing in a rise of 75 basis points to a range between 3 and 3.25%. Specifically, they give an 80% probability for this scenario, according to the CME FedWatch Tool. The percentage of possibilities for the promotion to be 100 points has grown in recent days to 20%.
But after the drink, the market begins to feel relieved and in the days after the critical day significant returns are usually accumulated. In the last 18 months, the S&P 500 index has risen after eight out of 10 Fed decisions. The first conclave in the series was the June 2021 meeting, just when there was a turning point for the bank due to the inflation pressure.
It was not until, practically, nine months later, in March of this year, when the Federal Reserve made a move for the first time in this cycle of increases with an increase of 25 basis points. The Fed removed rates from zero, the level that official rates were during the pandemic. Then came a new increase of 50 basis points in May, between 0.75% and 1%. And two more than 75 basic points in June and July, to leave the price of money between 2.25% and 2.5%.
“The expectations that there are now for the Fed are very aggressive, and that can play in the stock’s favor,” says Brad McMillan, chief investment officer at Commonwealth Financial Network. “Even if it raises rates, it may seem dovish,” he says, and the market always likes that, a demure central bank versus a hawk.
“The expectations that there are now for the Fed are very aggressive, and that can play in favor of the stock market”
Investors have been placed for weeks at the extreme of pessimism for the stock market, in part because they expect the RFederal reserve goes overboard by raising rates causing a disaster in the economy and in the market. According to the latest Bank of America survey of managers, animosity towards going public was at an all-time high.
“There has been so much speculation about the Fed’s next move that finally having a decision should provide much-needed relief to investors,” Danni Hewson, financial analyst at AJ Bell, told Reuters. Bloomberg. “If he sticks to the script and offers another 75 basis point hike, markets are likely to rally a bit, in part because the specter of a full percentage point hike failed to materialize.”
Another sign to cling to a lull in the current bear market is bearish positions on the S&P 500. Last Friday the volume of short contracts reached levels of 2008, 2011, 2015 and 2020. On these occasions, it coincided with the bottom of the market. At least it is one of the arguments of Marko Kolanovic, a star analyst at JP Morgan, and one of the great Wall Street analysts, who remains bullish on the stock market. “Solid earnings, investor pessimism and well-anchored long-term inflation expectations from the Fed should mitigate any downside in risk assets from here,” he comments Monday ahead of today’s meeting.