Accounting earnings of the markets before the Fed decision

This story originally appeared on Zacks

Stock indices closed their session lows on Tuesday, but also couldn’t sustain the afternoon rally to the green and slipped – much like we saw in the session. Monday – in the last half hour of trading. The Dow finished at -0.30%, -105 points, the S&P 500 at -0.74% and the Nasdaq pushed the caboose up, -1.14%, or -175.64 points. The small cap Russell 2000 lost almost a full percentage point on the day, -0.96%.
After nearly 40-year highs on both Consumer Price Index (CPI) and Producer Price Index (PPI) in recent days it has become a foregone conclusion on Wall Street that tomorrow’s Fed meeting will lead to much hawkish rhetoric about curtailing asset purchases, on the way to higher interest rates more sooner than later. Not that it’s an irresponsible move – higher rates are needed to absorb inflation, which is now seen as the main threat to the US economy in the near term.
Still, the flattening of buying will mark the end of the cheap money environment the Fed had put in place in February 2020, from the first flashes of Covid-19 threatening to cause a global pandemic (and international economic shutdowns ). Even when inflation measures began to soar, Chairman Jay Powell led the Fed into inaction, saying supply constraints as the global market woke up from the pandemic were together creating inflation” transient”. That word is now retired in terms of Powell’s current economic view, and the tightening is expected to progress tomorrow.
That’s why market participants are taking the opportunity to post gains ahead of Wednesday’s Fed announcement. We are far from a bearish trading mode: while it is true that the Nasdaq is now -6% from its all-time closing highs earlier in the year, it is still +20% since the start of the year. The Dow is still trading above its 50-day moving average, at -3% from all-time highs, and the S&P 500 has made year-to-date gains between the +28.9% achieved in 2019 and the +16.3% of 2020. So consider this recent sell-off as reasonable positioning to get back into performing markets once this dust settles.
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