After one of the worst weeks for the stock market in 2022, two factors could cause the market to swing over the next few days, setting investors ready for a turbulent fourth quarter.
The market is reeling after a massive sell-off on Friday, capping a two-week blackout that gripped
The index is down 9.2% to 3,693. The index is down 23% from its January peak. Federal Reserve Chairman Jerome Powell made clear that the Fed’s primary concern is inflationAnd the central bank is ready to impose financial pain to bring it down. Investors increasingly believe in him.
This means that the market is likely to swing on two main topics over the next few weeks – inflation data and any hints of what the Fed plans to do in its next few meetings. Next week, more of these hints may be on their way.
Investors will listen to quite a few Fed officials and will keep a close eye on language indicating any divisions among board members. Twelve of the 19 Fed governors and chairs will speak this coming week, “with virtually all appearances likely to touch on the economic outlook or monetary policy,” notes Deutsche Bank economists led by Brett Ryan.
While it appears that all Fed members are intent on continuing to raise rates from the current 3.0%-3.25% range, there are important differences as well. For example, “dot-plots” that Track where Fed officials see economic data and interest rates Looking ahead, members are evenly split between those who expect fed funds rates to peak at 4.75% next year, and those who see 4.5% and 4.25% rates higher. These may seem like relatively small differences, but they can make a big difference in the market, given how keen investors are to watch prices. If Fed officials start leaning toward a more dovish policy – gradually raising interest rates – the market is likely to rally. But this still seems like a long shot. For its part, Deutsche Bank expects interest rates to rise to 5%, which could be negative for investors.
Powell will appear himself twice in the next week. “The three members of the Fed leadership will speak, as Powell participates in a panel on crypto on Tuesday and on Wednesday delivers welcome remarks at a community banking conference, where Governor Bowman will also appear,” Ryan wrote.
In addition, there will be some data releases that may affect the market. On Thursday, the Bureau of Economic Analysis (BEA) will release its third estimate of GDP for the second quarter, and will likely revise some older numbers as well. Since it’s a number looking back, GDP often doesn’t move the market much. But any further sign that the economy is already in the doldrums could weigh on investor sentiment. It could also affect the Fed’s willingness to plunge the economy into a deeper recession if it becomes clear that a recession has begun. The latest estimate for second-quarter GDP was a 0.6% drop, after a 1.3% drop in the first quarter.
New data on durable goods, consumption and other economic activities will help forecasters estimate third-quarter GDP. Another quarter of declines may signal that the economy is already in recession — and tests the Fed’s desire to make the economic pain worse.
The biggest news is likely to come on Friday. The BEA will release the PCE price index, a key measure of inflation that the Federal Reserve is watching closely. That index rose 6.8% year-on-year in June – its highest level since 1982 – and fell to 6.3% in July. The core PCE index, which eats food and energy, rose 4.6%. Analysts expect core personal consumption expenditures to rise 4.7% in August.
Even with all the Fed officials planning to speak and release important statements, it is unlikely that there will be enough clarity next week about the path of rate hikes to determine which direction stocks will head for the rest of the year. Goldman Sachs on Friday Lowered its target in 2022 Standard & Poor’s 500 to 3600 from 4300 – another sign that Wall Street does not see a short term delay in the market.
Over the next two weeks, he wrote, “long-term investors may be reluctant to buy on weakness because it doesn’t look like any economic data or Fed talk will convince markets that a downward turn from this violent tightening campaign will happen any time soon.” Oanda analyst Edward Moya. “The downside targets for the S&P 500 include the 3470 level, which may look attractive to some long-term investors.”
Write to Avi Salzman at email@example.com