Stock market rally pauses as investors follow Fed signal
Last week, the Federal Reserve postponed raising rates after 10 consecutive hikes, instead waiting to see how the economy has reacted to the sharp rise in rates so far. This week, equity investors also paused for reflection, putting the recent rally on hold until the outlook becomes clearer.
The S&P 500 is heading for its first weekly decline since early May, which would end the index’s longest streak of gains since 2021. The S&P 500 is up about 14 percent this year, and more than 20 percent since its low point in October last year. year, crossed a technical threshold for the onset of a bull market, a term used by Wall Street to describe a period of investment enthusiasm. This week’s drop will shave just 0.6 percent off that gain.
Shares of smaller companies more exposed to the risk of a US economic slump fell further. The Russell 2000 index, which tracks these domestic-focused companies, has fallen every day this week, posting a 1.5 percent loss through Thursday. It’s heading for the worst week in three months.
A more cautious, subdued tone in last week’s trading echoed the message from Fed officials: more rate hikes may be needed, further increasing costs for consumers and businesses, but they will be guided by signals from the economy in forthcoming publications on inflation, jobs and other indicators. Fed chairman Jerome H. Powell said during congressional testimony Thursday that “the data will tell us what to do” regarding future rate hikes.
In other words, Fed policymakers and investors alike are waiting for more information to decide whether interest rates will continue to rise, which will determine how the stock market will respond.
“Markets and the Fed are looking at the same data and thinking the same way,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute. “They weren’t often on the same wavelength this year.”
Last week, the Fed acknowledged that the economy had proved more resilient than expected as the central bank attempted to slow down the economy and thereby cool inflation. This week, investors seemed to recognize that the strength of the economy justifies higher rates: Investors have for months questioned the Fed’s determination to keep raising rates, propelling stocks higher.
Investors’ bets on the number of Fed rate hikes this year are starting to climb higher, with investors now expecting another quarter-point hike by the end of the year. That’s still less than policymakers’ own forecast, which calls for two hikes this year, but it’s closer than in the past: Until recently, investors thought the Fed might cut rates at the end of the year.
The remaining disagreement, some investors say, stems from the caution some Fed officials have expressed about the outlook. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, supported previous rate hikes. But this week he said he expects to keep rates at current levels until the end of the year.
Elsewhere, other central banks continued their rate hike campaigns this week, with the Bank of England and Norwegian Norges Bank surprising investors with larger-than-expected moves.
Lauren Goodwin, an economist at New York Life Investments, said the market and the Fed “have come to the same understanding of the world,” warranting a wait-and-see approach. What happens next depends on how quickly inflation falls, and “the pace of disinflation has been so uncertain so far,” she said.
Jeanna Smilek reporting contributed.