Wall St week ahead

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

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NEW YORK, May 20 (Reuters) – The Federal Reserve’s determination to raise interest rates to crush the highest inflation in decades is clouding the outlook on Wall Street as U.S. stocks falter. bear market dawns and recession warnings mount. Stronger.

The problem is the so-called Fed put, or investors’ belief that the Fed will take action if stocks fall too deeply, even though it has no mandate to hold asset prices down. An oft-cited example of the phenomenon, named after a hedging derivative used to protect against market declines, occurred when the Fed halted a rate hike cycle in early 2019 after a stock market meltdown. .

This time around, the Fed’s insistence on raising rates as high as necessary to rein in soaring inflation has bolstered the argument that policymakers will be less sensitive to market volatility, further threatening Investors. Read more

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A recent BofA Global Research survey showed that fund managers now expect the Fed to intervene at 3,529 on the S&P 500 (.SPX), down from 3,700 expected in February. Such a drop would constitute a 26% drop from the S&P’s closing high on Jan. 3.

The index, which closed Friday at 3,901.36, is already down almost 19% from this year’s high on an intraday basis – close to the 20% drop 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, chief equity market strategist at Federated Hermes, which is increasing its cash levels. “The ‘Fed put’ is kaput until the central bank is satisfied that it is no longer behind the curve.”

As a result, some investors are digging for a long job. BofA’s survey showed cash allocations hit a two-decade high, while betting against tech stocks is at its highest level since 2006.

Strategists at Goldman Sachs, meanwhile, earlier this week released a “recession playbook for U.S. stocks” in response to client inquiries about how stocks will perform in a downturn. Barclays analysts said plenty of negative near-term catalysts mean the risks for equities “remain firmly piled on the downside”.

The S&P 500 closed broadly unchanged on Friday, reversing a sharp intraday decline that had briefly put it in bearish territory. The index marked its seventh consecutive week of losses, the longest streak since 2001.

Jason England, global bond portfolio manager at Janus Henderson Investors, believes the index needs to fall at least another 15% for the Fed to slow its tightening, given that unprecedented monetary policy support has helped stocks to more than double from their March 2020 lows.

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

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

REDUX 2018?

Some worry that the Fed could exacerbate volatility if it ignores possible signs of danger in asset prices. Analysts at the Institute of International Finance said stocks could be subject to the same kind of selloff that rocked markets in late 2018, when many investors believed the Fed had tightened monetary policy too much.

“In the past, growing uncertainty and growing recession risk have had significant effects on investor psychology, making markets less tolerant of monetary policy tightening that is no longer seen as warranted,” they wrote. IIR analysts on Thursday. “The risk of a similar market crisis (until 2018) is increasing again now that markets are worried about the global recession.”

There have been signs of resilience among investors. For example, the Cboe Volatility Index (.VIX), known as Wall Street’s Fear Gauge, is high but below levels it reached in previous selloffs. Read more

And ARK innovation fund ARKK.K, which has become emblematic of the pandemic rally, has generated positive net inflows of $977 million over the past six weeks, according to data from Lipper. The fund is down 57% in 2022.

While some investors say these are signals that markets are still at their lowest, others are more optimistic. Read more

Terri Spath, chief investment officer at Zuma Wealth, believes some investors are re-entering segments of the stock market that have suffered outsized losses.

“The Fed is already seeing signs that it won’t be needed as a buyer of last resort,” she said.

Deutsche Bank analysts are less optimistic.

“The Fed having got it badly wrong on the side of excessive inflation in 2020/21, cannot afford to make the same mistake twice – which favors tighter financial conditions and panicked markets (volatilities) high” , they wrote.

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

Our standards: The Thomson Reuters Trust Principles.

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