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Tuesday, May 24, 2022
The stock market isn’t trading like it’s expecting the Federal Reserve will swoop in to save it.
The S&P 500 has tumbled by more than 17% from a January record high through Monday’s close. The index has posted monthly losses each month this year except March, and it’s on track for another slide in May. The Nasdaq Composite has fared even worse, plunging more than 28% from its record high from Nov. 19, as once high-flying tech shares have been especially battered.
Market participants in the past haven’t trusted Fed officials to stay the course on their telegraphed monetary policy path when faced with this level of market volatility. This tendency by the Fed to be spooked by market turmoil and cornered into easing monetary policy has been known as the proverbial “Fed Put.”
As recently as 2019, this skepticism was well-placed: Eyeing a softening economy, trade uncertainties and a stock market in turmoil, the Fed delivered its first rate cut in over a decade, backing away from plans to raise interest rates further after hiking throughout 2018.
The market in early 2019 bet the Fed wouldn’t carry out the rate hikes it had suggested would take place for that year – and the market was right. This time around, however, commentators are confident the central bank won’t react the same way.
“[The ‘Fed Put’] pattern of behavior established a clear precedent that many market participants are still clinging [to] today, even as the Committee discusses rate hikes while the equity market pushes through key support levels,” Steven Ricchiuto, U.S. chief economist for Mizuho Securities USA, wrote in a note Monday. “Our continued bearish call on the equity market is predicated on the view that the ‘Put’ option no longer exists.”
“A strong belief in the ‘Put’ has kept bottom-up analysts from taking down their forward earnings estimates as they incorrectly hold on to the belief the Fed will reverse its tightening policy before the economy takes too serious a hit,” he added. “Instead, we see the recent deterioration in inflation as an overriding policy issue that precludes the Fed from reversing course unless there is clear evidence that inflation is moving back to target.”
In other words, while the market declines this year echo the kinds of declines that came before prior Fed pivots, the economic backdrop today looks very different. With inflation near 40-year highs, the Fed can’t as easily back down as it has prioritized reining in rising prices over virtually every other objective.
And the Fed has made clear it’s willing to risk both stock market prices and some economic growth if it means getting inflation in check. Last week, Fed Chair Jerome Powell acknowledged there “could be some pain involved in restoring price stability.”
Other Fed officials have been aligned with this messaging.
“I think what we’re looking for is the transmission of our policy through market’s understanding, and that tightening should be expected,” Kansas City Fed President Esther George told CNBC last week. “So it’s not aimed at the equity markets in particular, but I think it is one of the avenues through which tighter financial conditions will emerge.”
And right now, the market doesn’t seem to think the Fed is bluffing.
What to watch today
9:45 a.m. ET: S&P Global US Manufacturing PMI, May preliminary (57.7 expected, 59.2 during prior month)
9:45 a.m. ET: S&P Global US Services PMI, May preliminary (55.2 expected, 55.6 during prior month)
9:45 a.m. ET: S&P Global US Composite PMI, May preliminary (55.7 expected, 56.0 during prior month)
10:00 a.m. ET: Richmond Fed Manufacturing Index, May (12 expected, 14 during prior month)
10:00 a.m. ET: New Home Sales, April (750,000 expected, 763,000 during prior month)
10:00 a.m. ET: New Home Sales, month-over-month, April (-1.7%, -8.6% during prior month)
Abercrombie and Fitch (ANF) is expected to report adjusted earnings of 7 cents per share on revenue of $800.13 million
Autozone (AZO) is expected to report adjusted earnings of $26.23 per share on revenue of $3.73 billion
Best Buy (BBY) is expected to report adjusted earnings of $1.60 per share on revenue of $10.41 billion
Ralph Lauren (RL) is expected to report adjusted earnings of 39 cents per share on revenue of $1.46 billion
Petco (WOOF) is expected to report adjusted earnings of 14 cents per share on revenue of $1.45 billion
Agilent Technologies (A) is expected to report adjusted earnings of $1.12 per share on revenue of $1.62 billion
Nordstrom (JWN) is expected to report adjusted losses of 5 cents per share on revenue of $3.26 billion
Toll Brothers (TOL) is expected to report adjusted earnings of $1.50 per share on revenue of $2.10 billion
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