Like everyone else, I am looking and hoping for a turning point for stocks. We are past the point now where that is likely to come from a specific technical level, unless that level coincides with a change in fundamental conditions or some good news about the prospects for the economy. This is not a technical selloff; it is an adjustment to a changing reality, and that reality, or the prospects for it at least, has to change before the momentum can shift.
So, with the Fed announcement coming later today, what are the chances that it could prove to be the turning point for the market? The answer, unfortunately, is very little.
There are three possible scenarios today but, in the current mood, all of them have a downside for stocks. The Fed could raise rates by half a point, by three-quarters of a point, or by a full one percent. Or, to use market speak, by fifty, seventy-five, or one hundred basis points.
If the doves win the argument and Fed Chairman Jerome Powell announces a 50 basis point hike, we may see an initial relief rally in response to a lower-than-expected increase. However, the realization that such a move doesn’t really address the underlying problem will quickly come and we will head lower again before long. At the other end of the scale, a full one percent increase would be taken as a clear sign that the Fed is not afraid to slam the brakes on the economy and on demand, and that will inevitably prompt renewed selling as the central bank seems hellbent on pushing America into a recession.
The lose-lose nature of the two extreme positions and the fact that the FOMC is a committee, and thus predisposed to compromise, seems to make the 75 basis point option the most likely, but that will displease both sides of the debate. Those who still believe that post-pandemic disruption is a big part of the inflationary problem will see it as too stringent, likely to restrict demand unnecessarily, while those who believe that this is a problem created by loose monetary and fiscal policy more than global conditions will see it as another example of the FOMC staying stubbornly behind the curve and refusing to acknowledge reality so as not to upset their political masters.
The committee cannot win, so it is hard to see how stocks can either.
There is a sign of a possible rally in the chart, however. The S&P 500 closed yesterday 22.47% below its high from January 4, well into bear market territory. But after three massive down days in a row when the market closed at or near its low point each day, we finally saw a bounce of sorts to close the day with the index closing 30 points above its intraday low. Logically, late buying like that indicates a possible rally the following morning, and futures so far this morning point to the same thing.
The problem, though, is that a technical retracement rally such as we are seeing in this morning’s futures can only be meaningful in the long run if it coincides with some good news and, for the reasons detailed above, that looks highly unlikely later today. I do believe that at some point, it will be clear that some of the selling is overdone. I mean, is Apple (AAPL) really wort 27% less now that it was in January? Or should Netflix (NFLX) have lost 76%, and should it be trading at a trailing P/E of 15? Or, if tech isn’t your thing, is Boeing (BA) really worth less than half what it was a year ago?
In all cases I would say no, but with the Fed caught between a rock and a hard place, with anything they do likely to prompt even more selling, investors may be well advised to continue to hold off on buying for a while.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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