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The S&P 500 and Nasdaq 100 are both struggling to hold onto a month-old bullish flag formation. While the NASDAQ has been a good performer, it has also fallen to a two-week low. It’s also below its moving average, which is an indication of skittish investors.
Investors expect the Federal Reserve to raise interest rates by 0.75 percentage points for a third time in four months. Powell is expected to emphasize the Fed’s commitment to battling inflation and slowing growth, while also mentioning the US economy is holding up better than previously thought. This will likely lead to a hawkish Fed, which will be reflected in Wednesday’s minutes.
With the rate hike, the Treasury yields jumped to their highest level since 2007. For the first time, the yield on the 2-year Treasury note hit 4%. The 10-year rate rose to 3.6%. Traders expected the markets to move into sidelines until Wednesday’s FOMC decision.
During the recent decline, the majority of companies in the S&P 500 and Nasdaq declined. Specifically, 18 of the 20 stocks that dropped the most were in the entertainment and travel sectors. But the tech sector was also a strong performer. Nvidia, Microsoft, Skyworks, and DXC Technology were some of the biggest performers.
Those sectors and others are priced for perfection, which means their shares aren’t going to do too well until the Fed pauses its rate-hiking campaign. That’s why it’s critical for the Fed to be careful. If they overreact, they could end up destroying the economy. Similarly, if the economy grows too quickly, corporate earnings will be affected.
The Fed is expected to continue its policy-tightening campaign into 2023. They will update their forecasts for the economy over the next three years. And, they’ll deliver the latest insight on inflation in December’s FOMC meeting. These minutes will be released on Wednesday, and Chairman Powell will hold a traditional news conference following the decision.
Many analysts believe that the Federal Reserve is poised to push the economy into recession if it doesn’t pause its rate hikes. Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, believes that the economic scenario is almost two-thirds priced in. Despite the rise in inflation, he believes core inflation will remain sticky. In addition, he believes the Fed will eventually reach a point where it’s unwilling to continue hiking.
At the same time, the market has become more sensitive to the Fed’s narrative of slowing growth. The intersection of rising inflation expectations and the prospect of a sluggish economy will fuel continued volatility.
Earlier this month, the market was looking for a dovish read on the rate-hiking process. But the rate-hike has sent many parts of the market into deep bearish territory. Stocks are down about 30% from their all-time highs. Meanwhile, the VIX, or CBOE Volatility Index, has surged on days of stock declines. Generally, the VIX is lower during a bull market and higher on days of stock plunges