Wall St Week Ahead Rocky Stock Market Faces Fed Test With Eyes On Tightening Plans

A Wall Street sign is pictured outside the New York Stock Exchange amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, US, April 16, 2021. REUTERS/Carlo Allegri

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NEW YORK, April 29 (Reuters) – A volatile stock market faces a critical test next week, as the US Federal Reserve is expected to raise interest rates and provide more insight into its plans to tighten monetary policy to stem soaring inflation to fight.

Concerns about an increasingly aggressive Fed have helped the benchmark S&P 500 index (.SPX) fall about 11.5% so far in 2022, en route to its biggest percentage drop to end the year in more than half a century. to start. The month of April marked the biggest monthly decline since the start of the coronavirus pandemic in early 2020.

While investors have raised expectations of how aggressively the central bank could tighten monetary policy, many are concerned that the Fed will not be able to keep the economy afloat as it faces its worst inflation rate in nearly four decades.

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Monetary policy concerns intensified as investors have been annoyed by everything from rising bond yields to the war in Ukraine and more recently the lockdowns in China. The market is also entering a historically weaker six-month period for equities.

“We’re going to be dealing with more uncertain, choppy, volatile markets here for a while, I think, just because of the uncertainty,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas, who said that “things turned the other way at the start of the year,” coming out of a strong fourth quarter at the end of 2021.

Investors widely expect the Fed to raise interest rates by 50 basis points when the central bank’s meeting closes on Wednesday. They are also bracing for signals from Fed Chair Jerome Powell about the future path of interest rates, the central bank’s plans to shrink its balance sheet and its outlook on when inflation will decline. Policymakers raised interest rates by 25 basis points in March, the first hike since 2018. read more

“If the Fed continues to expect high levels of inflation and they don’t see it moderate in the future, that will be a concern for investors,” said Michael Arone, chief investment strategist at State Street Global Advisors. “It will mean that the Fed will continue to raise interest rates and tighten monetary policy, which is what the market expects, but maybe even more aggressively.”

In addition to next week’s action, policymakers have banded together around a general hike in federal funds rates to at least 2.5% by the end of the year. read more

Crucial to the tightening plans will be how dogged officials view the current pace of inflation after the March consumer price index showed an annualized increase of 8.5%, the largest increase in more than 40 years.

Given that there are indications that inflation is beginning to spike, Kei Sasaki, senior portfolio manager at Northern Trust Wealth Management, said, “If there’s an even more resounding hawkish note coming out of that meeting, it could certainly be viewed as negative.”

As investors pushed for tighter monetary policy, bond yields have risen this year, with the 10-year Treasury yield reaching about 2.9% from 1.5% at the end of 2021.

This has particularly put pressure on technology and growth stocks, whose valuations depend on future estimated cash flows that will be undermined if investors can earn more from risk-free bonds. The Russell 1000 Growth Index (.RLG) is down about 18% so far this year.

Meanwhile, investor sentiment is bad. According to the latest weekly survey by the American Association of Individual Investors, the percentage of individual investors who describe their six-month stock outlook as “bearish” has risen to 59.4%, the highest level since 2009.

Certainly, after the market’s recent decline, the Fed’s actions could offer some comfort if they don’t raise new concerns. Following the Fed’s expected rate hike in March, the S&P 500 rose more than 8% over the next two weeks.

Investors will continue to monitor corporate earnings after a mixed week of gains from mega-cap companies. Reports from Pfizer (PFE.N), Starbucks (SBUX.O) and ConocoPhillips (COP.N) will follow next week.

With the calendar turning to May, seasonality is also looming as a possible factor for investors. The strongest six months of the year for the S&P 500 since 1946 were November through April, when the index rose an average of 6.8%, according to the CFRA.

By comparison, from May to October, the index rose on average by just 1.7%.

More recently, however, the trends have not been quite as strong. According to a Reuters analysis, the S&P 500 has averaged a gain of 7.2% in the May-October period over the past five years, versus 5.5% in November-April.

“I don’t know how important seasonality will be this time around,” said Jack Ablin, chief investment officer at Cresset Capital Management.

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Reporting by Lewis Krauskopf, Additional Reporting by Chuck Mikolajczak, Editing by Louise Heavens

Our Standards: The Thomson Reuters Trust Principles.

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