Federal Reserve Meet Remains Key for S&P 500 This Week
June 12 2022 - 4:41PM
Finscreener.org
Equity markets experienced
another day of sustained sell-off on Friday as investors remain
wary of rising inflation rates. In May, inflation rose by 8.6% year
over year marking the fastest increase since December 1981. The
consumer price index or CPI which measures the prices of goods and
services increased higher than estimates of 8.3%, dragging equity
indices lower.
The S&P 500 fell by 2.9%
on June 10 which means it is now inching closer to bear market
territory as the flagship index is down 18% from all-time highs. A
bear market is defined as a drop of more than 20% from record
highs.
The CPI rose 1% compared to April
as energy prices were up 3.9% in this period. In 2022, energy
prices have already surged by 34.6% acting as a key catalyst to
inflation. Investors will be closely watching the Federal Reserve’s
decision to hike interest rates in the upcoming
week.
Jerome Powell, the chairman of
the Fed, will brief the press on Wednesday, after a two-day
meeting. The Central Bank is expected to increase interest rates by
0.5% but will policymakers take an aggressive stance given
challenging macro-economic conditions.
New economic and interest rate
forecasts will be released by the Fed on Wednesday at 2 pm EST but
the press conference will provide details on upcoming hikes which
could further derail the stock market.
In addition to the Fed meeting,
investors will brace for other economic reports such as the
producer price index on Tuesday, retail sales data on Wednesday,
housing starts on Tuesday, and industrial production on Friday.
Tech giant Oracle (NYSE:
ORCL) will report its
quarterly earnings on Monday.
Interest rate hikes might lead to a
recession
Market participants are waiting
to see if accelerated interest rate hikes will lead to an economic
recession. Historically, higher interest rates shift investment
capital towards lower-risk investments such as bonds. As borrowing
costs for corporates increases, their earnings will compress
leading to lower valuations. Further, rising inflation numbers will
result in a fall in consumer spending, negatively impacting the
top-line of companies.
Investment banks including
Barclays (NYSE: BCS)
and Jeffries now expect interest rates to rise 75 basis points or
0.75% while Goldman Sachs (NYSE: GS)
estimates an additional interest rate hike of 0.5% in
September. JP Morgan (NYSE:
JPM) has forecast the fed
funds rate to rise to 2.625% in 2022, up from its previous guidance
of 1.875%.
Treasury yields rose after the
inflation report was released on Friday while the yield curve has
flattened. It means shorter duration yields such as the 2-year
Treasury yield have inched closer to longer duration yields
including the 10-year Treasury yield. The 2-year Treasury yield
stood at 3.06%. If the 2-year yield rises above the 10-year yield,
the curve would be inverted which has historically been a signal for a
recession.
In past bear markets, the
S&P 500 declined on an average of 32%, and in the last
financial crash of 2008-09, it declined by 56%.
According to an RBC analyst,
there is a 60% chance the market might have set a bottom. The
valuations are reasonable enough, suggesting you can go bottom
fishing and buy shares at a discount.
Barclays (NYSE:BCS)
Historical Stock Chart
From Aug 2024 to Sep 2024
Barclays (NYSE:BCS)
Historical Stock Chart
From Sep 2023 to Sep 2024