As the Federal Reserve prepares for another jumbo rate hike, stocks are wobbly.
With the S&P 500
sliding back toward its June low below 3,670, the question of whether the Dow Jones Industrial Average
would slide back below the 30,000 level was trending Tuesday. The Dow fell 313.45 points, or 1%, Tuesday to close at 30,706.23, leaving the blue-chip gauge up 2.7% from the perhaps psychologically important 30,000 threshold. The Dow closed at its 2022 low of 29,888.78 on June 17.
A 1% decline in the S&P 500’s closing price on Tuesday led to a 5.2% rise from its June 16 closing low of 3,666.77. In light of concerns regarding the economic outlook triggered by the Fed’s aggressive tightening pace and hikes by other central banks, those mid-June lows are crucial, with analysts warning that a test could arrive soon.
When the Fed concludes its two-day meeting on Wednesday, it is expected to raise rates by 75 basis points, or 0.75 percentage points, with some traders and analysts expecting a full percentage point raise. For clues about when the fed-funds rate is likely to peak – a level called the terminal rate – investors will be looking at the updated forecast of rate expectations by Fed policy makers – the so-called dot plot.
According to Tom Essaye, founder of Sevens Report Research, the market’s fall over the past weeks has priced in a 75-basis-point hike and a median Fed forecast of a terminal rate around or below 4.25%. In his view, a scenario such as that would not result in a significant move in either direction, and it does not make a retest of June’s lows any less likely than it is today.
A rate hike of 100 basis points and/or a median terminal rate forecast above 4.5% would be a different story: In this scenario, market expectations would be confirmed that the Fed is even more hawkish than previously feared, which would further pressure stocks, leading to a test of the June lows, according to Essaye. Essaye predicts that all 11 S&P 500 sectors will be lower on the day, with defensive sectors and low-volatility ETFs outperforming relatively.
The Fed will announce its rate decision at 2 p.m. Eastern on Wednesday, with Fed Chair Jerome Powell set to hold a news conference at 2:30 p.m.