The stock market is holding its breath as traders prepare for the pivotal Federal Reserve meeting of the year. The markets, as usual, are expected to move in a narrow range until the rate decision is unveiled. The trading direction will ultimately hinge on several crucial factors, including any adjustments in the Fed’s language in the post-meeting policy statement, the growth, inflation, and rate projections outlined in the Summary of Economic Projections, and Chair Jerome Powell’s pronouncements during the subsequent press conference.
While speculation and futures markets suggest a 50 basis point cut could be on the table, a majority of economists anticipate a more modest 25 basis point reduction. However, some strategists are apprehensive that a more significant cut could be interpreted as a confession from the central bank that the economic landscape is a cause for concern.
On Tuesday, a robust surge in August retail sales ignited a powerful buying wave, but this momentum faltered in the afternoon session. As a result, the major indices ended the day with a mixed performance, ending narrowly higher. The S&P 500, however, notched its seventh consecutive session of gains, reaching an intra-day high during the initial buying surge, before concluding the day marginally higher, now at its most favorable level since August 23rd.
Scott Merkle, managing partner of SLB Capital Advisors, emphasizes that a cut is practically guaranteed, and the market’s attention will shift to deciphering the implications of a 25 basis point versus a 50 basis point reduction. Merkle predicts a 25 basis point reduction from the current Fed funds rate range of 5.25%-5.50%. He expects the Fed to initiate a gradual approach, allowing for adjustments in future periods. Lower rates, he argues, will rejuvenate M&A activity, stimulate the sale-leaseback market, and reduce financing costs.
LPL Financial Chief Technical Strategist Adam Turnquist notes that over the past nine major rate hiking cycles dating back to the 1970s, the S&P 500 has exhibited a mixed, modest performance in the three months following the first cut. The 12-month average and median returns stand at 5.5% and 10.8%, respectively. However, he points out that the 12-month maximum drawdowns after the first cut have been around 19%-20%, exceeding the average maximum drawdown for all years since 1974 of 14.4%. He underscores that the economy’s resilience and whether a recession is imminent will ultimately dictate how stocks perform over the longer term.
In the commodities market, crude oil futures extended their steep decline from Tuesday, while gold futures witnessed a modest rise ahead of the Fed decision. The benchmark 10-year Treasury note gained 2.4 points to 3.666%. Bitcoin BTC/USD surged, approaching the $60K psychological resistance level. The dollar weakened against its major counterparts in the currency market.
The major Asian markets that were open displayed nervousness and concluded the day mostly lower, reflecting apprehension ahead of the U.S. Fed decision. The Australian, Japanese, and Chinese markets defied the downward trend, while the Hong Kong and South Korean markets were closed for public holidays. European stocks predominantly declined in early trading as market participants absorbed domestic inflation data and awaited the Fed decision.
