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Wall St week ahead As the bear market approaches, the battered Wall St searches for elusive “Fed-put”

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, USA, March 21, 2022. REUTERS / Brendan McDermid

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NEW YORK, May 20 (Reuters) – The Federal Reserve’s determination to raise interest rates until it breaks decades’ highest inflation darkens prospects for Wall Street as US equities stand on the brink of a bear market and warnings of a recession grow. higher.

It is about the so-called Fed pad, or investors’ belief that the Fed will take action if shares fall too deep, even if it does not have a mandate to maintain asset prices. An often cited example of the phenomenon, which is named after a hedging derivative used to protect against market falls, occurred when the Fed stopped a rate hike cycle in early 2019 after a tantrum on the stock market.

This time, the Fed’s insistence that it will raise interest rates as high as necessary to curb rising inflation has strengthened the argument that decision-makers will be less sensitive to market volatility – something that threatens more pain for investors. read more

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A recent survey from BofA Global Research showed that fund managers now expect the Fed to enter 3,529 on the S&P 500 (.SPX), compared to expectations of 3,700 in February. Such a fall will constitute a decrease of 26% from S & P’s final high on 3 January.

The index, which closed Friday at 3,901.36, is already down almost 19% from its highest this year on an intraday basis – close to the 20% decline that would confirm a bear market, according to some definitions.

“The Fed has bigger fish to fry, and that’s the inflation problem,” said Phil Orlando, head of stock market strategist at Federated Hermes, which is raising its cash levels. “The Fed putt” is kaput until the central bank is sure they are no longer behind the curve. “

As a result, some investors dig after a long battle. BofA’s survey showed that cash allocations were at a level of two decades, while games against technology stocks are at their highest level since 2006.

Meanwhile, strategists at Goldman Sachs earlier this week published a “Recession Manual for US equities” in response to customer inquiries about how equities will perform in a downturn. Barclays analysts said many negative catalysts in the short term mean that equities’ risks “remain firmly stacked to the downside.” read more

The S&P 500 closed largely unchanged on Friday, reversing a sharp decline during the day that had briefly put it in bear market territory. The index marked its seventh week of losses in a row, the longest in a row since 2001.

Jason England, global bond portfolio manager at Janus Henderson Investors, believes that the index must fall by at least another 15% for the Fed to slow down the tightening, given that outstanding monetary policy support contributed to more than doubling equities from the lowest level in March 2020.

“The Fed is very clear that there will be some pain going forward,” he said.

The Fed has already raised interest rates by 75 basis points and is expected to tighten monetary policy by 193 basis points this year. / FEDWATCH Investors will gain more insight into the central bank’s thinking when the minutes of the last meeting are published on 25 May.

2018 REDUX?

Some worry that the Fed risks exacerbating volatility if it does not take into account possible danger signals from asset prices. Analysts at the Institute of International Finance said that stocks may be subject to the same type of sale that shook the markets at the end of 2018, as many investors felt that the Fed tightened monetary policy too much.

“In the past, increasing uncertainty and rising recession risk have had important effects on investor psychology, making markets less tolerant of monetary tightening that is no longer considered justified,” IIF analysts wrote on Thursday. “The risk of a similar outburst of rage (until 2018) is increasing again now as markets worry about global recession.”

There have been signs of a resilient mood among investors. For example, the Cboe Volatility Index (.VIX), known as Wall Street’s fear meter, is elevated, but below levels it reached during previously large sales. read more

And ARK Innovation Fund ARKK.K, which became emblematic of the pandemic rally, has brought in a net positive inflow of $ 977 million over the past six weeks, Lipper data showed. The fund is down 57% in 2022.

While some investors say that these are signals that the markets are not yet at the bottom, others are more hopeful. read more

Terri Spath, investment manager at Zuma Wealth, believes that some investors are re-entering parts of the stock market that have suffered heavy losses.

“The Fed is already seeing signs that they will not be needed as a last resort buyer,” she said.

Analysts at Deutsche Bank are less optimistic.

“The Fed, which has made serious mistakes on the side of excessive inflation in 2020/21, cannot afford to make the same mistake twice – which favors more tightening of financial conditions and the ongoing high (volatility) panicked market,” they wrote.

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Reporting by David Randall in New York Editing by Ira Iosebashvili and Matthew Lewis

Our standards: Thomson Reuters Trust Principles.

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