Will The Fed's November Move Support US Stocks?
The aggressive tightening strategy, which threatens to send the US into recession, has caused markets to lose the most since 2008.
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The Federal Reserve is projected to raise interest rates by three-quarters of a percentage point on November 2, marking the fourth consecutive big hike. If the Fed maintains its hawkish stance and sets the stage for interest rates to reach around 5% by March 2023, it may precipitate a US and global recession.
Despite fears of a recession, the Federal Reserve is about to raise interest rates again, and the most recent job data is expected to show that wages are still rising and boosting inflation. With such jumbo-sized rate hikes in its struggle against unrelenting inflation, the Fed is entering uncharted terrain.
The impact on asset classes is evident, with both equities and debt suffering. The aggressive tightening campaign, which threatens to send the US into recession, has resulted in the greatest losses in stocks since 2008 and the worst yearly drop in bonds on record.
Many stock values have not yet bottomed out when future rate hikes are factored in. Nonetheless, the market may be discounting future rate hikes in the face of incoming economic data. Despite terrible earnings from a number of prominent technology companies, shares have risen from earlier this month's lows.
US shares ended a volatile week with a hefty gain as Apple Inc.'s earnings report bolstered technology companies and a slew of economic data suggested the Federal Reserve is making progress against inflation. The Nasdaq 100 and the S&P 500 both had their longest weekly rising streaks since August. Both indices fell for the second day in a row on Friday, but increases in key technology businesses such as Alphabet Inc., which owns Google, and Microsoft Corp. helped to offset this.
S&P 500 1 Month Chart
Meanwhile, global central banks becoming more dovish. The Reserve Bank of Australia and the Bank of Canada both boosted their benchmark rates by less than experts and traders expected at their most recent policy meetings. Investors also perceived the European Central Bank to be less forceful.
If the December rate hike goes as expected, a 50-basis-point move may boost the stock market. On November 10, the market will learn how much core inflation has been contained by the October CPI data. The market expects a Fed Pivot, which helped boost stocks recently. Until economic conditions improve, investors should expect volatility.
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