(Bloomberg) — For depressed equity investors, the expected interest rate hike from the Federal Reserve on Wednesday could bring some relief.
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US stock markets are feeling the heat ahead of the Fed meeting, with the S&P 500 and Nasdaq 100 Indexes falling 6.2% and 7% respectively over the past six days, on the off chance that Chairman Jerome Powell could take a more hawkish stance . to fight scorching inflation.
But if history is any guide, the markets could be in for a bounce once the meeting is over and done with.
In the past 18 months, the S&P 500 Index has risen after eight Fed decisions. In the days following the Fed meetings in January, March and June, stocks rose between 6% and 9%, after falling sharply in the period before.
“The prospects are very hawkish, and the Fed can come out exactly as expected and still be more dovish than expected,” Brad McMillan, chief investment officer of the Commonwealth Financial Network, said in emailed comments. . “That probably limits the downside in the market from this meeting and may provide some upside going forward.”
Wednesday is expected to bring the Fed’s fifth consecutive rate hike this year, taking benchmark borrowing costs to 3.25%. That drove 10-year Treasury yields above 3.5%, the highest since 2011, forcing many investors to dump shares.
But the extreme bearish position could also be a source of support for stocks. Fund managers are the most underweight common stocks ever, and cash levels are at an all-time high, according to Bank of America Corp.’s latest monthly survey.
S&P 500 futures gained 0.3% by 7:04 a.m. in New York, while Nasdaq 100 contracts were little changed.
“There has been so much speculation about the Fed’s next step that a final decision should provide some much-needed relief for investors,” said Danni Hewson, financial analyst at AJ Bell. “If it sticks to the script and delivers another 75 basis points it’s likely to result in a lot of roaming deals, in part because a full percentage point hike hasn’t materialized.”
Another gauge, the CFTC’s S&P 500 non-traded net futures, also shows an extremely negative outlook, having reached levels last seen during the downturns of 2008, 2011, 2015 and 2020. The sentiment is often seen that grim as a contrarian indicator, indicating a relapse. .
“Strong earnings, low investor positioning and well-entrenched long-term inflation expectations should moderate any decline in risk assets from here,” JPMorgan Chase & Co strategists, led by Marko Kolanovic, said in a note on Monday.
Market technicals may be showing that a bottom is near, especially for technology shares. The tech-heavy Nasdaq 100 has fallen 27% this year, and about 16% of its constituents are currently trading just above their 200-day moving average.
Analysis shows that this type of technical breadth has been very weak at the same time as previous market bottoms — except for 2008.
Not everyone is confident that a rally is imminent. US equity valuations remain elevated relative to history and previous economic downturns, keeping some investors wary of increased exposure as the Fed continues to raise rates.
“We expect a policy over-tightening that will lead to a recession,” said Wei Li, BlackRock Inc.’s chief global investment strategist. in a note on Monday. She has an underweight tactical position on equities, as “recession risks have not yet been factored in.”
According to Nomura quant analyst Yoshitaka Suda, supply-demand dynamics among speculative investors are setting up US equities for softer, with macro funds taking short positions immediately after the latest US inflation data. Macro funds will “remain on the short side in US equities at least until employment data is released” on Oct. 7, Suda said in a note.
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