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Could the Fed Trigger an S&P 500 Crash This Week?


Oct. 28 2019, Updated 2:05 p.m. ET

The S&P 500 Index (SPX), which is trading close to an all-time high, could be affected by the Fed’s tone in its upcoming meeting. The FOMC’s (Federal Open Market Committee) two-day meeting will begin on October 29. The Fed will announce its interest rate decision on October 30.

Markets expect Fed Chair Jerome Powell to cut interest rates by 25 basis points to bring the target range down to 1.50%–1.75%.

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Will the Fed’s decision crash the market?

Goldman Sachs has assigned about a 95% probability to a rate cut. The market expects the cut to address the impact of US-China trade tensions, which have led to fears of a global slowdown. Though recent trade talks have bought on optimism, most of the existing tariffs are still in place.

The high probability of a rate cut shows that the surging S&P 500 is already factoring in the reduction. Any deviation from this expectation could prove detrimental to the markets.

According to a MarketWatch report, Independent Advisor Alliance’s Chris Zaccarelli said, “If the Fed were to disappoint the markets by not cutting next week, I think we could see a pullback of anywhere from 3-5%, but it all depends on how the Fed communicates their decision.”

Markets monitoring the Fed’s tone

Besides the current rate cut expectation, the market is monitoring the Fed’s tone on the future course of action. If the Fed hints at the end of the rate cut period, it could again send markets into a slump. But most expect the Fed to make future rate changes based on the economic data.

According to a CNBC report, Goldman Sachs economist Spencer Hill said, “We expect a slightly hawkish tone, with Powell alluding to a baseline of unchanged policy but emphasizing data-dependence and the ability to respond quickly if the outlook deteriorates.”

In the future, the Fed may consider all economic data points, macroeconomic conditions, and the possible impact of geopolitics before making a call on rate changes.

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S&P 500 reactions to previous meetings

Powell will have to walk a tightrope as he tries to balance the advocates and critics of the rate cuts. Markets are expecting an announcement of expanding policy leading to a rate cut. If the Fed cuts rates, it will mark the third cut of the year.

Earlier, Powell referred to the rate cut as a “midcycle adjustment,” pointing out the fact that future rate cuts aren’t guaranteed. However, the Fed signaled that it would make the necessary adjustments when needed.

Earlier this year, after the Fed’s meetings, the markets fell 3%–4%. After the May 1 meeting, the S&P 500 Index (SPY) fell 4.0% in the next eight trading days. In the same time span, after the July 31 meeting, the index fell 3.4%.

So, the market’s expectation of a 3%–5% fall if the Fed doesn’t meet expectations seems to be in line with previous occurrences.

What to watch for along with the Fed meeting?

With the S&P 500 Index rallying close to its all-time high, even slightly negative news could send the market falling. Amid earnings, markets have moved up, as most expected dull numbers from corporates. So, while the market is ignoring the earnings misses, it’s applauding the beats.

This week will start with heavyweights Alphabet (GOOGL) (GOOG), AT&T (T), and T-Mobile US (TMUS) reporting their results on October 28. Google has been in the news due to its Google Fi services, the Huawei ban, and its recruitment of Microsoft executives. To learn more about AT&T, read Is AT&T Stock a ‘Buy’ before Its Q3 Earnings?

Later in the week, tech companies Apple (AAPL) and Facebook (FB) will report their earnings. While Apple stock has reached new heights, it will be great to see whether its earnings meet analysts’ expectations. To learn more, read Why Apple’s Q4 Earnings Will Be Unique. Facebook’s rivalry with China also seems to be deepening.

Pharmaceutical players Pfizer (PFE), Merck & Co. (MRK), and Bristol-Myers Squibb (BMY) and financial companies Mastercard (MA) and Citigroup (C) will also post results this week.

Many economic data points will also be released. Advance trade in goods, the consumer confidence index, the employment index, consumer spending, core inflation, the ISM manufacturing index, and many more data points are slated for release.

It’s going to be a big week for the S&P 500.


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