The stock market is getting crushed again. The chances that he will revisit his recent fund are higher now.
is experiencing its fourth straight day of decline on Friday. It is now down about 13% from the mid-August peak of a summer rally. One important factor: Stubbornly high inflation is putting pressure on the Federal Reserve to raise the federal funds rate at a rapid pace. This week, the Fed indicated that it sees the “peak” of the federal funds rate topping 4.5%, slightly higher than previously forecast. The Fed is trying to reduce the rate of inflation by reducing economic demand, so the problem for the stock market is that the economy could take a hit – and corporate profits too.
All this landed the market at a dangerously low level. The S&P 500 this week dropped below a level just above 3800 – it is now one tick below 3700. This is critical; at just over 3,800, buyers have recently stepped in a few times to support the index. These buyers left because confidence in the market’s prospects waned. With the index now more in a downtrend, “the failure to maintain  it’s a big change of character for the market, it increased the chances of a quick drop to June lows,” wrote John Kolovos, chief technical strategist at Macro Risk Advisors, in a research report.
Speaking of that June low, the market is definitely flirting with revisiting it. The intraday low for the year is 3,636, reached in mid-June. The possibility of the S&P 500 going back to that level is frightening not only because it represents a small loss from here, but also because traders would have to wait at this point for it to be able to buy “support” there. If the index dips below this support level, the next support level is approximately just below 3500. This represents a loss of about 5% from here.
That’s the bad news, but don’t lose hope just yet. There is still a positive scenario. If the index can find support near the low, it could experience an “impulsive rally” beyond the 4100 area, Kolovos wrote. That’s where a brief early September rally ended — and vendors stepped in. Buyers at that level would mean an increasingly confident market.
Indeed, there may be some positive developments to send the market back up. The main development would be that the Fed does not raise the federal funds rate above 4.5%. Historically, the Fed has generally not raised rates to its forecast, noted Sevens Report Research. In 2015, the Fed projected that the federal funds rate would reach just over 3% a few years from now. In 2019, it peaked at around 2%. That’s because interest rates rise as the Fed’s rate hike campaign begins, which reduces borrowing and spending. Then economic growth declines and the Fed pauses rate hikes.
“If the economy starts to slow significantly in the next few months, history indicates that the Fed will have … to reduce its expectation of terminal-fed funds,” wrote Tom Essaye of the Sevens Report.
That would likely put a floor on economic growth forecasts. The gains, although achieved, may not reach catastrophic levels. The market can then look to better days when economic and profit growth can be trusted.
The point is that the market is at a crossroads and the next trading days will be key.
Write to Jacob Sonenshine at firstname.lastname@example.org