Stocks traded flat this morning as markets remained coiled ahead of the Fed minutes release, due out at 2 pm EST. Interest rate fears and poor retail guidance caused stocks to plummet yesterday before diving lower into the close. Today, bulls have been unable to stage a comeback.
Traders and analysts alike were left speechless following yesterday’s plunge, but was it really all that surprising?
Not necessarily. The S&P (as represented by the SPY) set a lower high after enjoying a massive rally since the start of the year. The index finally broke its trend (yellow trendline) last week before dipping once more, closing below the much-watched 10-day moving average.
The SPY then closed below the 20-day moving average on Friday and raced toward the 50-day moving average yesterday.
It may have seemed like a drastic selloff, but given how quickly stocks advanced in January, it’s the kind of move that investors should have anticipated.
“While the market pullback over the past few days may have seemed sudden and significant, we believe it has actually been tame and perfectly expected, given the sudden and significant market rally seen throughout January and in part of February,” said Bahnsen Group Chief Investment Officer David Bahnsen.
Stocks initially traded higher today prior to a CNBC appearance from St. Louis Fed President Jim Bullard, who delivered a hawkish sledgehammer to sentiment shortly after the market opened.
“It has become popular to say, ‘Let’s slow down and feel our way to where we need to be.’ We still haven’t gotten to the point where the committee put the so-called terminal rate,” Bullard said.
“Get to that level and then feel your way around and see what you need to do. You’ll know when you’re there when the next move could be up or down.”
The Fed’s terminal rate for 2023 is currently 5.1%, which implies a federal funds target range of 5.0%-5.25%. The terminal rate was lifted from 4.6% to 5.1% in December.
By comparison, the current target range is 4.50%-4.75%. That suggests the Fed will only increase rates by another 50 basis points (0.50%) to reach the terminal rate. The market assumed that the Fed would raise rates by 25 basis points over its next two meetings to get there.
Recent talk from Fed officials suggests that the Fed is thinking about a 50 basis point hike at its next meeting, though, calling into question whether the fed funds rate will actually stop at 5.0%-5.25%.
This led to a sudden jump in yields that stocks weren’t ready for. That was especially true for interest rate-sensitive tech names.
The S&P is now resting near key psychological support at 4,000 as a result. If this level of support fails to hold when the Fed minutes hit at 2 pm EST, even heavier selling could follow. A “bad minutes release” would include any indication that the Fed is considering a 50 basis point increase at its next meeting. Which, based on recent comments from Fed officials, seems to be the case.
