Stocks whipsawed every direction this morning as traders got the week off to a choppy start. The Dow, S&P, and Nasdaq Composite all opened lower on the day before recovering to trade flat through noon.
“It’s a very quiet session thus far,” said Vital Knowledge founder Adam Crisafulli in a note to clients.
“Stocks have climbed off their lows from earlier in the morning, but sentiment is still very gloomy. The consensus playbook for the week seems to be anticipating a brief rally around the FOMC, which most people plan to use as an opportunity to book profits in preparation for further downside (a return to the June lows is thought by many to be inevitable).”
Rising Treasury yields were to blame for the session’s early bearishness. The 10-year rate climbed to 3.51% today, hitting an 11-year high. Yields jumped in anticipation of Wednesday’s rate hike as the Fed is expected to raise rates by 75 basis points. However, following a hotter-than-expected CPI reading for August, a 100 basis point hike is seemingly now on the table.
“We think a 100 bps hike would unnerve Wall Street, as it would imply that the FOMC is overreacting to the data rather than sticking to its game plan, and would increase the likelihood that the FOMC will eventually overtighten and lessen the possibility of achieving a soft landing,” said CFRA’s Sam Stovall.
Regardless of how much the Fed raises rates this week, though, analysts have begun to prepare clients (mentally, at least) for a long bear market.
Morgan Stanley’s Andrew Sheets described the current investing climate in a morning note.
“It was common to hear some variation of ‘TINA’ (There Is No Alternative), the idea that one needed to be long stocks and bonds because cash offered so little. Low yields were not the primary reason why stocks rallied over that time; global equities and global equity earnings simply rose by the same amount (~100%),” Sheets wrote.
“The market is still facing late-cycle conditions: inflation that is too high, policy that is tightening, a yield curve that’s inverted, and a slowdown in growth that is ahead not behind.”
There’s not much to be bullish about these days other than the fact that stocks look oversold following the market’s wicked drop that began last Tuesday. The S&P is now down roughly 6% from last Monday’s close. The index’s forward P/E ratio is also back to near where it was when the June lows were set, prior to the big summer rally.
But that won’t really matter if Powell sticks to his guns and delivers a hawkish message at his Wednesday post-FOMC press conference. The Fed continues to claim that a “soft landing” for the US economy is the central bank’s goal.
The reality, however, is that achieving such an outcome at this point is utterly impossible. The Fed was far too dovish when it didn’t need to be. Add that to a dysfunctional global economy – something FedEx confirmed late last week with its horrible quarterly earnings – and you’ve got the makings of a “hard landing” instead.
Powell may claim this Wednesday that a soft landing is still possible. Sadly, it isn’t, and it’s clear now that investors are starting to realize it. So, even though stocks do look oversold in the very short term, the chances of a bullish reaction to the coming FOMC meeting have dwindled significantly. If anything, investors should expect another bearish continuation – not a post-FOMC rally – when Powell speaks Wednesday afternoon.