Powell’s Short-Term Stock Market Fate Is Pretty Safe

Powell’s Short-Term Stock Market Fate Is Pretty Safe

For the third time in a row, the US Federal Reserve raised the Fed Funds rate by three-quarters of a percentage point, putting the overnight lending rate between 3.00% and 3.25%.

Earlier this year, that rate was close to 0%.

Fed Chairman Jerome Powell indicated that although it was not his goal, a recession may be necessary to cure inflation. “There is a very high probability that we will have a period of … much lower growth,” Powell said in remarks after the rate hike announcement.

Powell’s focus is clearly on inflation. With two meetings left this year, the Federal Open Market Committee’s dot plot shows more hikes on the way. The FOMC is expected to end the year with a rate of 4.4%. We could be looking at a further rise of the same size in early November, followed by a half percentage point rise in mid-December.

The good news is that it could be the end. The dot plot shows a rate of 4.6% next year, slightly above the projected year-end 2022 figure of 4.4%.

The bad news is that, based on current projections, rates aren’t expected to drop until 2024.

Powell’s comments ended the stock market’s short-term fortunes. Just last week, I pointed out that a 3700 attempts on the S&P 500 was on the cards. As futures continued to decline after Wednesday’s close, the large-cap index was less than 100 points from that figure.

The S&P 500 is still well below its 50-day (blue) and 200-day (red) moving averages. The index has not closed above its 200-day moving average since April 8.

We referenced “3700,” but the real support area is a bit lower, a range between 3655 and 3686 (shaded in yellow). If the price can enter that yellow area, we could hit an air pocket. More sellers could be drawn in as the S&P 500 will have hit a year-to-date low.

A sharp move lower could lead to capitulation. Fears will rise, along with the Flexibility Index, and heavy selling could result. Intraday, a long red candle could be in its wake as buyers look for deals, and try to bottom out.

Keep in mind that while everyone is discussing interest rates, quantitative tightening is also in place. This program reduces the Fed’s $9 trillion balance sheet, and is another anti-inflation measure.

This month, the Fed raised its quantitative easing figure to $95 billion per month — as you can read about here amazing Real Money article on this subject.

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