After one of the worst weeks for the stock market in 2022, two factors could swing the market in the coming days and set investors up for an exciting fourth quarter.
The market is on the upswing after a broad sell-off on Friday, capping a two-week swoon that took the
down 9.2%, to 3693. The index is down 23% from its January peak. Federal Reserve Chairman Jerome Powell has made it clear that the Fed’s main concern is inflation, and the central bank is willing to inflict financial pain to reduce it. Investors are increasingly believing him.
That means the market is likely to revolve around two main themes in the coming weeks – inflation data and any hint of what the Fed plans to do in its upcoming meetings. In the next week, more of the tips could be on the way.
Investors will hear from many Fed officials and will be watching closely for language that indicates any splits among board members. Twelve of the 19 governors and Fed presidents are speaking next week, “and almost every appearance could be related to the economic outlook or monetary policy,” noted Deutsche Bank economists led by Brett Ryan.
While all members of the Fed appear intent on continuing to raise rates from the current 3.0%-3.25% range, there are also important disagreements. For example, the “dot plots” that track where Fed officials see economic data and future interest rates show that members are evenly split between those who expect Federal Funds rates to peak at 4.75% on next year, and those who see 4.5% and 4.25% as the highest rates. Those differences may seem small, but they can make a big difference in the market, given how closely investors are watching rates. If Fed officials begin to lean toward a more dovish policy—raising interest rates more gradually—the market is likely to rise. But that still feels like a long shot. Deutsche Bank, for its part, expects rates to rise to 5%, which could be negative for investors.
Powell himself will appear twice in the coming week. “All three members of the Fed leadership will speak, with Powell participating in a panel on digital currencies on Tuesday and Wednesday giving welcome remarks at a community banking conference, at which Gov. Bowman also featured,” Ryan wrote.
In addition, there will be a number of data releases that may have an impact on the market. On Thursday, the Bureau of Economic Analysis (BEA) will release its third estimate of second-quarter gross domestic product, and may also revise some older figures. Because it is a backward-looking number, GDP often does not move the market much. But any other sign that the economy is in recession could have an impact on investor sentiment. It could also affect the Fed’s willingness to push the economy into a deeper recession if it becomes clearer that a recession has begun. The last estimate of second quarter GDP was a 0.6% decline, following a 1.3% decline in the first quarter.
New data on durable goods, consumption and other economic activity will also help forecasters estimate third-quarter gross domestic product. Another quarter of cuts would make it more clear that the economy is already in recession – and test the Fed’s willingness to make the economic pain worse.
The biggest news is likely to come on Friday, however. The BEA will release the price index for personal consumption expenditure, a key inflation measure that the Fed watches closely. That index increased 6.8% year-on-year in June—the highest level since 1982—and eased to 6.3% in July. The main PCE index was up 4.6%, taking out food and energy. Analysts expect the core PCE to rise 4.7% in August.
Even with all these Fed officials planning key speeches and data releases, it’s unlikely that there will be enough clarity in the coming week about the path of rate hikes to determine where stocks will go for the rest of the year. Goldman Sachs cut its 2022 S&P 500 target to 3,600 from 4,300 on Friday to 3,600 from 4,300 – another sign Wall Street doesn’t see a near-term recovery for the market.
“Over the next few weeks, long-term investors may be reluctant to buy into weakness as no economic data release or Fed speak seems to convince the markets that a turnaround from this aggressive tightening campaign is on the way any time soon,” wrote. Oanda analyst Edward Moya. “Downside targets for the S&P 500 include the 3,470 level, which could look attractive to some long-term investors.”
Write to Avi Salzman at firstname.lastname@example.org