Post-Fed rally in stocks awaits market if history proves correct

(Bloomberg) — For stock investors mired in pessimism, the Federal Reserve’s expected interest rate hike on Wednesday may actually provide some relief.

US stock markets have been feeling the heat ahead of the Fed meeting, with the S&P 500 and Nasdaq 100 indices falling 6.2% and 7% respectively in the last six days, on the prospect of a for President Jerome Powell to take an even more aggressive stance. to combat blistering inflation.

However, if history is any guide, the markets may need to bounce once the meeting is over and dusted off.

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

“Expectations are very aggressive, and the Fed may come out as expected and still be more dovish than expected,” Brad McMillan, chief investment officer at Commonwealth Financial Network, said in emailed comments. “That is likely to limit the market downturn from this meeting and may provide some advantage going forward.”

Wednesday is expected to bring the Fed’s fifth straight rate hike this year, taking benchmark borrowing costs to 3.25%. That has pushed 10-year Treasury yields above 3.5%, the highest since 2011, forcing many investors to dump stocks.

But extreme bearish positioning could also be a source of support for stocks. Fund managers are more underweight stocks than ever, while cash levels are at their highest on record, according to the latest monthly survey from Bank of America Corp.

S&P 500 futures were up 0.3% at 7:04 a.m. in New York, while Nasdaq 100 contracts were little changed.

“There has been so much speculation about the Fed’s next move that finally having a decision should provide some much-needed relief for investors,” said Danni Hewson, financial analyst at AJ Bell. “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 indicator, CFTC S&P 500 Net Non-Commercial Futures, also shows an extremely negative view, having reached levels last seen during the 2008, 2011, 2015 and 2020 recessions. This gloomy sentiment is often seen as a contrarian indicator, marking a rebound. .

“Solid earnings, weak investor positioning and well-anchored long-term inflation expectations should mitigate any downside in risk assets from here,” JPMorgan Chase & Co. strategists led by Marko said in a note. Kolanović, on Monday.

Market technicals may also be signaling a bottom is coming, especially in technology stocks. The tech-heavy Nasdaq 100 is down 27% this year, with about 16% of its constituents currently trading just above its 200-day moving average.

Analysis shows that this type of depressed technical breadth has coincided with previous market bottoms, with the exception of 2008.

Not everyone is confident that a rally is imminent. US equity valuations remain elevated compared to history and previous economic downturns, making some investors wary of adding exposure as the Fed continues to raise rates.

“We expect excessive policy tightening leading to recessions,” Wei Li, chief global investment strategist at BlackRock Inc., said in a note Monday. He has a tactical underweight stance on stocks, because “recession risks are not yet factored in.”

According to Nomura Quantitative Analyst Yoshitaka Suda, supply-demand dynamics among speculative investors are setting up US stocks for further weakness, with macro funds piling up short positions on the heels of the latest data from US inflation macro funds “will remain on the short side of US equities at least until the employment data release” on Oct. 7, Suda said in a note.

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