The Fed is set for a pause. Why the stock market is set for a fall. – Barrons
The S&P 500 index had gained 7.7% this year, in part on hopes the Fed would take a pause. Economic growth has slowed, dragging inflation down with it, giving Fed Chair Jerome Powell reason to stop tightening if he chooses to. That’s a relief for the market, which struggled with some of the fastest rate hikes in history last year.
Still, the stock market fell as the Fed hiked rates a quarter-point, but hinted that a pause is indeed imminent. The S&P 500 fell 0.8%, while the Dow Jones Industrial Average fell 1.2%. Only the Nasdaq Composite finished higher, up 0.1%.
We can easily cite a few reasons for the decline over the past week. A market expecting a pause is not a market that will recover when it gets what it wants. And while the Fed signaled the end of rate hikes, it didn’t signal the start of rate cuts, leading some observers to dub Powell’s action a “hawkish pause.” But the biggest reason may be the ongoing collapse in bank stocks.
SPDR S&P Bank’s exchange-traded fund (ticker: KBE) fell 8.1% last week despite First Republic Bank’s sale to JPMorgan Chase (JPM), which was meant to end the crisis but appears to have hastened it. Keep in mind that high interest rates are one of the main reasons banks are under pressure in the first place, as depositors move to higher-yielding alternatives. Another raise — and a plan to stay high — isn’t going to help the situation much.
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“The Fed doesn’t really think about what can go wrong with the banking system,” said Rhys Williams, chief investment officer at Spouting Rock Asset Management.
Powell also downplayed the possibility that the Fed could — or should — do anything about the debt ceiling. Treasury Secretary Janet Yellen has set the X-date for June 1, less than a month away. The financial markets are worried, even if the stock markets are not. The cost of protecting against a US default with credit default swaps has increased tenfold since the end of 2022, while Thursday’s one-month Treasury bill auction saw yields hit a record high of 5.84%. Add it to the list of things the Fed isn’t really thinking about.
Of course, an unexpectedly strong jobs report did much to calm jitters about an imminent recession. But despite a big gain on Friday, the S&P 500 failed to return to 4200, a key level that acted as a ceiling for the index. And the longer the index fails to break through, the more likely it is that the next move will be lower. Evercore strategist Julian Emanuel puts the next level of support at around 3800, down 8.1% from Friday’s close of 4136.25 and dropping to the bear market low of just under 3600.
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“There will be much better risk/reward opportunities to add to stocks than there are now,” says Emanuel.
As the cliché goes, patience is sometimes a virtue.
write to Jacob Sonenshine at [email protected]
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