The Fed is set for a break. Why the stock market is ready for a fall.
The S&P 500 had risen 7.7% this year, partly on hopes that the Fed will take a break. Economic growth has slowed, dragging down inflation, giving Fed Chairman Jerome Powell a reason to stop tightening monetary policy, if he chooses. That’s a relief for the market, which struggled last year with some of the fastest rate hikes in history.
Still, the stock market fell as the Fed raised interest rates by a quarter of a point, but indicated that a pause is indeed on the way. The
S&P 500
fell 0.8%, while
Dow Jones Industrial Average
fell 1.2 percent. Just that one
Nasdaq Composite,
up 0.1[ads1]%, ended higher.
We can easily dismiss some reasons for the decline in the last week. A market that expects a break is not a market that rallies when it gets what it wants. And while the Fed signaled the end of rate hikes, it did not signal the beginning of rate cuts, leading some observers to refer to Powell’s action as a “hawkish pause.” But the biggest reason may be the continued collapse of bank stocks.
The
SPDR S&P Bank
exchange-traded fund (ticker: KBE ) fell 8.1% last week, despite the sale of First Republic Bank to JPMorgan Chase ( JPM ), which was supposed to end the crisis but appears to have accelerated it instead. Remember that high interest rates are one of the main reasons banks are under pressure in the first place, as depositors move to higher yielding options. Another increase – and a plan to stay high – will not help the situation much.
Advertisement – Scroll to continue
“The Fed doesn’t really think about what could go wrong with the banking system,” says Rhys Williams, chief investment officer at Spouting Rock Asset Management.
Powell also played down the possibility that the Fed could – or should – do something 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 market is not. The cost of protecting against default in the US with credit default swaps has increased tenfold since the end of 2022, while Thursday’s auction of one-month Treasury bills yielded a record 5.84%. Add that to the list of things the Fed doesn’t really think about.
Of course, a stronger-than-expected jobs report did much to calm nerves about an impending recession. But despite a big Friday gain, the S&P 500 failed to get back to 4,200, a key level that has served as a cap on the index. And the longer the index fails to break through, the more likely the next move will be lower. Evercore strategist Julian Emanuel pegs the next support level at about 3,800, down 8.1% from Friday’s close of 4,136.25, and then a drop to bear market lows just below 3,600.
Advertisement – Scroll to continue
“There’s going to be a much better risk/reward opportunity to add to stocks than there is now,” Emanuel says.
As the cliché goes: Patience, sometimes, is a virtue.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
