The market already looks nervous about the Fed.
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The stock market has rallied on hopes the Federal Reserve will soon pause its interest rate increases. That is a good reason to sell, said
Morgan Stanley
‘s chief U.S. equity strategist Mike Wilson.
The
S&P 500
has started off the year in the green, contributing to a roughly 13% gain from the low point of its bear market hit in early October. Since then, the rate of inflation has declined, fueling hopes the Fed can pause lifting interest rates after its expected quarter-point increase in the federal-funds rate this week.
Higher rates are meant to reduce economic demand to lower inflation. Investors fear the Fed will tighten right into a recession, so a potential end to rate increases is encouraging the stock market.
“Better price action in stocks has started to convince many investors they are missing something—compelling them to participate more actively,” Wilson wrote.
The problem now is that the Fed takes center stage Wednesday, and may give news the market doesn’t want to hear. That is because it has plenty of incentive to point to more rate increases than expected.
It may need to use its commentary to spur interest rates in the bond market to rise because rates have recently fallen. A decrease could potentially increase borrowing, spending, and inflation.
Meanwhile, inflation has still been well above the Fed’s 2% target, so the Fed wants to ensure rates don’t fall too much.
“Investors seem to have forgotten the cardinal rule of ‘Don’t Fight the Fed’,” wrote Wilson. “The good news is now priced, and reality is likely to return with month end and the Fed’s resolve to tame inflation.”
Already, the market looks nervous about the Fed. With two more days until the Fed speaks, traders are selling. All three indexes were in the red Monday morning and the Nasdaq Composite was down more than 1%.
Sure, that makes it possible that the market will come into Fed day down enough to post a gain when the Fed speaks. Just don’t have high hopes for any substantial rally.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
Credit: marketwatch.com