As investors get ready for the year’s final Federal Reserve meeting and a crucial inflation report, a double dose of possibly market-sensitive U.S. events take place the following week. This could establish the tone for asset prices throughout the rest of 2022 and beyond.
In the past week, the S&P 500’s (.SPX) most recent recovery came to a halt as stronger-than-anticipated economic data stoked worries that the Fed would need to hold interest rates higher longer than expected in order to combat inflation, potentially triggering a recession. The index is still down more than 17% for the year despite a 10% comeback from its October lows.
The direction that stocks take in the near future could depend on whether the consumer price index statistic released on Tuesday reveals that inflation is reacting to the Fed’s most aggressive rate hike cycle since the 1980s. Hotter-than-anticipated data may increase concerns about further Fed hawkishness, pushing equities lower.
According to Tom Hainlin, a national investment strategist at the U.S. Bank Wealth Management, if CPI exceeds forecasts or possibly shows no fall at all, it won’t be good for the market.
The S&P 500 has moved an average of roughly 3% in either direction during the past six CPI releases, versus a typical daily change of approximately 1.2% over the same period. CPI data have been the key driver of these lop-sided market thumps this year.
This includes inflation data on September 13 that caused a 4.3% sell-off and a report on softer-than-expected inflation on November 10 that spurred a 5.5% jump and assisted equities in continuing their recent run.
The second round of positive statistics would strengthen the case for an inflation peak and boost the stock market even more.
David Lefkowitz, director of U.S. equities at UBS Global Wealth Management, claimed this year’s CPI reporting period has been rather volatile in general, and there is no reason to believe that trend will continue when the data is released the next week.
The Fed will raise rates by half a percentage point next week, a reduction from its previous trend of increases of three quarters, according to investors. Wall Street will be concentrating on the central bank’s forecasts for how high levels will finally rise because Wednesday’s rate decision is generally considered a foregone conclusion.
The opinions of Fed Chairman Jerome Powell on inflation and the likelihood that the economy could enter a recession next year, an assumption that has recently dominated investor thinking and been reflected in asset prices, will also be crucial.
One frequently studied indication is the Treasury yield curve, which recently inverted to its sharpest level in at least 20 years on the U.S. government bonds market, amplifying a signal that has previously foreshadowed economic downturns.
Hainlin of U.S. Bank Wealth Management expressed his concern that investors’ earnings estimates have not yet taken into account the burden that higher rates will have on consumer and business expenditure. The company favours shares in industries seen as safe havens during difficult economic periods, such as utilities and healthcare, and is modestly overweight fixed income.
Some feel that if inflation is weaker than anticipated or investors approve of the Fed’s remarks, a sizable amount of cash remaining on the side-lines and seasonal considerations may help the market bounce.
In recent months, investors who have reduced their equity holdings and increased their cash reserves have the propensity to join stock rallies, which has helped accentuate upward movements in equities.
According to Deutsche Bank research released on December 4, stock positioning has gradually risen in recent weeks, but it has stayed lower than it has been for around 86% of the duration since January 2010.
Last month, according to a study by BofA Global Research of fund managers, cash balances were almost at multi-decade highs.