Stocks found their footing Wednesday as investors awaited a Federal Reserve decision that was expected deliver another jumbo rate hike, with investors increasingly focused on just how high policy makers expect rates to go.
Major indexes pushed higher on Wednesday, but still look wobbly. With bears looking for the S&P 500
to slide back toward its June low below 3,670, the question of whether the Dow Jones Industrial Average
would slide back below the 30,000 level was trending Tuesday. The Dow fell 313.45 points, or 1%, Tuesday to close at 30,706.23, leaving the blue-chip gauge up 2.7% from the perhaps psychologically important 30,000 threshold. The Dow closed at its 2022 low of 29,888.78 on June 17.
The S&P 500 fell 1.1% on Tuesday to finish at 3,855.93. It’s up 5.2% from the large-cap benchmark’s June 16 closing low of 3,666.77. Those mid-June lows are crucial, with analysts warning that a test could soon arrive amid worries over the economic outlook tied to the Fed’s aggressive tightening pace and hikes by other central banks.
The Fed is expected to deliver a rate increase of 75 basis points, or 0.75 percentage points, when it concludes its two-day meeting on Wednesday, with some traders and analysts penciling in the outside chance of a full percentage-point increase. Investors will be focused on the updated forecast of rate expectations produced by Fed policy makers — the so-called dot plot — for clues where the fed-funds rate is likely to peak — a level known as the terminal rate.
The stock market’s fall over the past weeks has priced in a 75-basis-point hike and a median Fed forecast for a terminal rate around or slightly below 4.25%, wrote Tom Essaye, founder of Sevens Report Research, in a Tuesday note. An outcome in line with that scenario would be unlikely to result in a significant move in either direction, “and importantly it does not make a retest of the June lows any more likely than it is today,” he wrote.
A rate hike of 100 basis points and/or a median terminal rate forecast above 4.5% would be a different story: “This outcome would confirm market expectations that the Fed is even more hawkish than previously feared, and it would further pressure stocks and at this point a test of the June lows would become likely barring a material surprise,” Essaye said. “Defensive sectors and low-volatility ETFs should outperform, but only relatively, and we’d expect all 11 S&P 500 sectors to be lower on the day,” Essaye said.
The Fed will announce its rate decision at 2 p.m. Eastern on Wednesday, with Fed Chair Jerome Powell set to hold a news conference at 2:30 p.m.