Decision time for Fed, markets

Amid moderate inflation readings from the Consumer Price index (CPI) and Producer Price Index (PPI)—along with in-line weekly jobless claims—stocks are coming off one of their best weeks of 2024, fueled by strong rebounds in tech and small caps.

On the eve of one the most highly anticipated Federal Reserve meetings in recent memory, the S&P 500 (SPX) followed up its deepest weekly decline in 18 months with its biggest up week of the year, leaving the index less than 1% below its record high on Friday:

The headline: Market bounces back pre-Fed.

The fine print: Investors have been baking in expectations of rate cuts for a long (long) time, pushing stocks to record levels in the process. Now that the main event has finally arrived, traders shouldn’t ignore the possibility of a sentiment letdown, given what Morgan Stanley Wealth Management notes could be a slow pace of easing.¹ Morgan Stanley & Co. strategists also point out continued labor market weakness may curb a “risk-on” attitude toward stocks in the near future.²

The number: 51%, the market-based probability (as of Friday) that the Fed will cut rates by 0.25% (instead of 0.5%) this week.³ As recently as last Wednesday, the odds were as high as 86%.

The scorecard: Tech strength propelled the Nasdaq 100 (NDX) to a market-leading gain last week, and its best week of the past year:

Sector returns: The strongest S&P 500 sectors last week were information technology (+7.3%), consumer discretionary (+6.2%), and communication services (+4.3%). The weakest sectors were energy (-0.8%), financials (+0.5%), and consumer staples (+1%).

Stock movers: Viridian Therapeutics (VRDN) +32% to $18.75 on Tuesday, Netgear (NTGR) +31% to $20.84 on Thursday. Aligos Therapeutics (ALGS) -29% to $13.79 on Tuesday, ModivCare (MODV) -59% to $12.76 on Thursday. Summit Therapeutics (SMMT) rallied 160% last week after news of successful clinical results for its lung-cancer drug.

Futures: Oil prices rebounded after falling to their lowest level since December 2021 last Tuesday. A 2.8% Thursday rally helped October WTI crude oil futures (CLV4) end the week up nearly $1 at $68.65. December gold (GCZ4) broke out to fresh record highs, ending the week up $86 at $2,610.70. Week’s biggest gains: December palladium (PAZ4) +19.3%, September bitcoin (BTCU4) +12.1%. Week’s biggest declines: September VIX (VXV4) -11.6%, October ethanol (ZKV4) -6.9%.

There are plenty of numbers in this week’s economic pipeline—along with a quarterly (“triple witching”) expiration—but it will all take a back seat to the FOMC meeting and the Fed’s interest rate announcement:

●Monday: Empire State Manufacturing Index
●Tuesday: Retail Sales, Industrial Production and Capacity Utilization, business inventories, NAHB Housing Market Index
●Wednesday: Housing Starts and Building Permits, Fed interest rate decision
●Thursday: Philly Fed Manufacturing Survey, Existing Home Sales, Leading Economic Indicators Index
●Friday: quarterly expiration (stock options, index options, index futures)

This week’s earnings include:

●Monday: Ennis (EBF)
●Tuesday: Ferguson Enterprises (FERG)
●Wednesday: General Mills (GIS), Steelcase (SCS)
●Thursday: Cracker Barrel (CBRL), Darden Restaurants (DRI), FedEx (FDX), Lennar Corp (LEN)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Last week stocks bucked the (mild) historical odds of additional downside after an SPX decline in the short week after Labor Day. But what happened after weeks like last week, when the SPX more or less erased a 4.25% weekly loss?

The SPX has followed a 3.5%-4.5% down week with a 3.5%-4.5% up week 64 other times over the past 67 years. The index closed lower the next week in 36 cases, or 56% of the time.⁴ (Interestingly, the last time a weekly pivot of this magnitude occurred was in early September 2022. The SPX rallied 3.7% the following week.)

But this week isn’t just any week. Investor reaction to Wednesday’s Fed rate decision—and more to the point, to what Fed Chair Jerome Powell says in the post-announcement press conference—will likely be the determining factor in how the market performs this week.

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¹ MorganStanley.com. The GIC Weekly: How Far, How Fast? 9/6/24.
² MorganStanley.com. Shaky Labor Data Pressures Equity Markets. 9/9/24.
³ CMEGroup.com. FedWatch Tool. 9/13/24.
⁴ A figures reflect S&P 500 (SPX) weekly closing prices, 1957–2024. Supporting document available upon request.